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TMI Blog1989 (11) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... towards the amounts due to the bank from the said company. M.C.A. No. 37 of 1989 is filed by the official liquidator, who is the liquidator of the said company, for an order to sanction declaration of a first dividend of 27 paise in the rupee to the creditors of the company under sections 529 and 529A of the Companies Act. Notice of these applications was given to the Income-tax Department. This court passed order dated March 30, 1989, permitting the bank to appropriate a sum of Rs. 75,00,000 from out of the sale proceeds towards the amounts due to the bank under the loan, transactions of Giovanola Binny Ltd. (in liquidation). However, this court made it clear that if it was found later that the balance amount is not sufficient to meet the claims of the Income-tax Department as well as other claims, it will be open to this court to reopen this order and to direct the bank to bring to the common pool the whole or any portion of the amount allowed to be appropriated. Subsequently, by order dated July 3, 1989, in M.C.A. No. 37 of 1989, this court granted sanction to the liquidator to declare a first dividend of 27 paise in the rupee as shown in annexure A to the said application to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which provision for workmen's dues shall be paid along with the debt due to secured creditors in priority to all other debts, notwithstanding anything contained in any other provision of the Companies Act or any other law. The claim of the bank is as a secured creditor of both these companies, the properties sold having been mortgaged to the bank. The instructive analysis of Rashbehary Ghose in his Tagore Law Lectures, Law of Mortgage (6th edition, page 61), is very much helpful to understand the word "mortgage". "A mortgage may be viewed in two aspects. In the first place, it is a promise by the debtor to repay the loan and as such it is a contract which creates a personal obligation. Secondly, it is also a conveyance, since it passes to the creditor a real right in the property pledged to him. However, the right created in the land is only an accessory right, intended merely to secure the due payment of the debt." Section 58( a ) of the Transfer of Property Act provides that a mortgage is the transfer of an interest in any immovable property for the purpose of securing the payment of money. Then, the question whether the mortgage right of the bank will be subject to the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tue of its prerogative, is entitled to say : 'In payment of debt I have the right to come first and to enforce that right I can proceed by way of writ of extent.' I should not myself describe this as two prerogative rights, of which one is larger than the other, but rather as one prerogative right and a prerogative remedy to enforce the right. I can understand that the Crown might surrender the latter, while retaining the former, but not that it could surrender the former while retaining the latter. If the right to come first is surrendered, the prerogative remedy to enforce that right by writ of extent must have been surrendered also. The question for decision, therefore, I think is, and is only, whether the Crown has surrendered the prerogative right to come first. The effect of section 209 is as follows : By section 209, sub-section (1)( a ), certain Crown debts, which I will call the specified Crown debts, are brought into the class of debts identified by section 209(1)( a ), ( b ), ( c ), ( d ). Debts of this class are to be paid in priority to all other debts', in priority, therefore, to (amongst others) the unspecified Crown debts. Subject to the priority right of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1908, referred to in Food Controller v. Cork [1923] AC 647, which is as follows : "530(1). In a winding-up, subject to the provisions of section 529A, there shall be paid in priority to all other debts ( a ) all revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause ( c ) of sub-section (8), and having become due and payable within the twelve months next before that date ;" (rest of the section omitted). Thus, it is clear that ( i ) this provision is subject to the provisions of section 529A of the Companies Act, and ( ii ) revenues, taxes, cesses and rates must have become due and payable within the 12 months next before the relevant date, which is the date of appointment of the provisional liquidator or the date-of winding-up, as the case may be, in order that they may be paid in priority to other debts. Therefore, the income-tax now claimed will not come within the purview of section 530(1)( a ) of the Companies Act, since the sale of the properties of the companies took place after the passing of the winding-up orders. Moreover, it has to be observed that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n payment of the costs of preservation, strictly so described, so far as the other assets of the company are not sufficient; and thirdly, in payment of the principal, interest and mortgagees' costs, all of which have priority over the general costs of the liquidation and the costs of carrying on the business of the company." This judgment was confirmed by the appellate judgment of Scott C. J. (at page 221 of [1917] ILR 42 Bom). Rashbehary Ghose in Tagore Law Lectures, Law of Mortgage (6th edition, page 388), relying on various authorities, has observed that "It seems a Government debt in India is not entitled to precedence over a prior secured debt". Section 476 of the Companies Act provides that the court may make an order for payment out of the assets of the costs, charges and expenses incurred in the winding up, in such order of priority inter se as the court thinks just. The meaning of the word "assets" can only mean the assets of the company in liquidation. It will not include the mortgage right which is an asset of the bank. However, section 529A has created a new priority in respect of workmen and secured creditors. Even if income-tax is treated as winding up cost, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may be extremely difficult for the company to raise capital for its working. In this connection, we would draw attention to the provisions of clause ( a ) of sub-section (1) of section 319 of the English Companies Act, 1948, under which arrears of land tax, income-tax, profits tax, excess profits tax or other assessed taxes rank in priority over other debts of a company only if they have been assessed on the company up to a particular date, namely, 5th April, or prior to the appointment of the liquidator or resolution for the winding-up of the company and do not exceed in amount the whole of one year's assessment. It will be noticed that by comparison the provision of clause ( a ) of sub-section (1) of section 230 of the Indian Companies Act is much wider and gives much more latitude to the income-tax authorities for under these provisions, arrears of taxes would rank in priority if they have become due and payable within twelve months next before the date on which they are payable irrespective of whether such taxes have been assessed on the company or not. We are aware of the large arrears of income and other taxes which are due by many companies, which are in liquidation, but w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h relied on ITO v. Indian Traders Bank Ltd. [1968] KLT 595 (Ker) (which judgment was confirmed in the un-reported decision in A. S. No. 224 of 1968) for holding (at p. 185) "(1) that the amount 'set aside' is outside the scheme of winding up ; and (2) that the Income-tax Department is put practically in the same position as a secured creditor, and gets, so to say, a first charge on the amount due", even though Raman Nayar J., as he then was, had in his judgment in Indian Traders Bank's case [1968] KLT 595 (Ker), observed that the payments to the secured creditor (at p. 185) "are really not so much cases of priority as of the particular asset not being available for distribution among the creditors in the winding up" and it "stands on the same footing as, for example, trust funds". It may be mentioned that Civil Appeal No. 1199 (NT) of 1979 against the Full Bench judgment in Imperial Chit Funds' case [1979] 49 Comp Cas 58 (Ker) ; 116 ITR 176 (Ker), pursuant to the certificate granted by that Bench, is pending before the Supreme Court. It is clear that neither section 178 of the Income-tax Act nor any provision in the Companies Act confers priority to income-tax in winding-up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion since the Assessing Officer has not notified the Official Liquidator to set aside any amount from the assets of both these companies. In C.A. No. 478 of 1989 relating to Giovanola Binny Ltd. (in liquidation), there will be a direction to the Official Liquidator to declare a further dividend in respect of the amount of Rs. 27 lakhs provisionally set apart as per the order of this court in M.C.A. No. 37 of 1989, to the workmen and to the Canara Bank under section 529A of the Companies Act. Before doing so, the liquidator will reimburse to the Canara Bank the amounts advanced by the bank to the liquidator and the expenses incurred by them which will be ordered separately. In M.C.A. No. 106 of 1988 and C.A. No. 478 of 1989 and A. No. 487 of 1989 in respect of Brunton and Company (Engineers) Ltd. (in liquidation), the liquidator is directed to declare a further dividend under section 529A of the Companies Act in respect of the sum of Rs. 25,59,526.50 to the workmen and to Canara Bank after reimbursing the Canara Bank amounts advanced by the bank to the liquidator and the expenses incurred by the bank which will be ordered separately. Applications disposed of accordingly. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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