Bank of India Vs. Siriguppa Sugars & Chemicals Ltd. & Ors  Insc
806 (7 August 2007)
Chatterjee & P.K. Balasubramanyan
APPEAL NOS.3499-3500 OF 2007 (Arising out of SLP(C) No.181-182 of 2004) P.K.
These appeals challenge the interim order passed by the Division Bench of the
High Court in a pending writ appeal, directing disbursement of certain amounts realised
on sale of stocks of sugar, owned by the first respondent company held under
pledge by the appellant--bank. The Labour Commissioner had passed an order
under Section 33(c) of the Industrial Disputes Act against the first respondent
company in respect of the dues to the workmen. The same was challenged by the
first respondent in the writ petition as also by others. Similarly the Cane
Commissioner had passed orders for recovery of amounts due from the first
respondent- company for being paid to the sugarcane growers for the cane
supplied by them to the first respondent-company. During the pendency of the
writ petition, the recovery authority had taken possession of stock of sugar
lying pledged to the appellant bank and under its control, forcibly and without
reference to the appellant--bank. The appellant--bank had got itself impleaded
in the writ petition. Considering that the sugar stock was liable to lose its
value by being stored indefinitely, the court had directed sale of the sugar.
The sale fetched a price of Rs.1,53.50,400/-. Out of the same, a sum of Rs.10,60,800/-
was paid towards excise duty and the balance was held under orders of court.
writ petition filed by the first respondent challenging the recovery
proceedings, both at the instance of the Labour Commissioner and the Cane
Commissioner was dismissed by the learned Single Judge. The decision of the
learned Single Judge was challenged in appeal. In the appeal filed by the
company, the impugned interim order was made directing that a sum of
Rs.43,00,000/- be made available to the Labour Commissioner for disbursement to
the employees of the company, a sum of Rs.60,00,000/- be made available to the
Cane Commissioner for disbursal to the sugarcane cultivators who had supplied
sugarcane and a sum of Rs.20,00,000/- be paid to the appellant--bank, subject
to the bank obtaining sanction from the Board for Industrial and Financial
Reconstruction (for short "BIFR") and that the balance shall be kept
in a fixed deposit subject to final orders.
appellant bank has challenged this order on the ground that its right as a pawnee,
well recognised by law, had been totally ignored by the Division Bench of the
the order is clearly illegal and that such an interim order ought not to have
been passed when the final adjudication had to be made in the appeals that were
pending before the High Court.
may notice here that there are no proceedings for winding up of the first
respondent-company under the Companies Act. The first respondent-company has
only approached BIFR by way of reference under Section 15(1) of the Sick
Industrial Companies (Special Provisions) Act.
Learned counsel for the appellant--bank submitted that the High Court was
clearly in error in ignoring the rights of the appellant as a pawnee and in
ignoring the binding decisions of this Court on the rights of the pawnee to the
proceeds of the sale of the goods pledged to it to secure a debt due from the
borrower. According to him, the bank as pawnee has the first charge on the
stock of sugar and the charge crystalised when the stock of sugar pledged with
it was sold.
it has thus crystalised, the bank had a priority over the debts due to other
unsecured creditors. Neither the Cane Commissioner, nor the Labour
Commissioner, in this case or the workmen, on whose behalf he was acting, were
secured creditors. Consequently, the right of the appellant as the pawnee must
prevail. Counsel submitted that the workmen become secured creditors only when
there is a winding up and it is Section 529 of the Companies Act that made them
secured creditors, entitled to disbursement pari pasu with other secured
creditors. In the absence of any winding up proceeding the workmen had no
preferential rights and their status, at best, was that of unsecured creditors.
Counsel further submitted that by passing such an interim order the Division
Bench had seriously prejudiced the rights of parties which remain to be
determined in the writ appeal itself and such an interim order ought not to
have been passed.
behalf of the respondents, it was contended that the amounts due to the
sugarcane growers and to the workmen had to be provided for and going by some
of the decisions of this Court, the workmen's dues could not be ignored and
under the circumstances, there is no reason to interfere with the interim order
passed by the Division Bench of the High Court. Additional Solicitor General
also submitted that the question whether sales tax dues or the dues under a
certificate issued by the Debt Recovery Tribunal had priority, had been
referred to a larger Bench for a decision. It was submitted that the decision
in State of M.P. vs. Jaura Sugar Mills Ltd. And
others (1997 (9) SCC 207) will apply here. On behalf of the State it was
submitted that the decision in State of M.P.'s
case (supra) held the field and the order of the Division Bench was supportable
in the light of that decision.
right of the lender, or pledgee, is to retain the chattle until a proper tender
of the amount due is made.(See The Law of Mortgages by Edward F. Cousins) Under
Section 173 of the Contract Act, a pawnee has the right to retain the goods
pledged for payment of the debt including interest on the debt and all
necessary expenses incurred by the pawnee in respect of the possession or for
the preservation of the goods pledged. The rights of the pawnee were summed up
by this Court in Lallan Prasad vs. Rahmat Ali and another (1967 (2) SCR 233 at
is no difference between the common law of England and the law with regard to pledge as codified in sections 172 to 176 of
the Contract Act. Under Section 172 a pledge is a bailment of the goods as
security for payment of a debt or performance of a promise. Section 173
entitles a pawnee to retain the goods pledged as security for payment of a debt
and under Section 175 he is entitled to receive from the pawner any
extraordinary expenses he incurs for the preservation of the goods pledged with
him. Section 176 deals with the rights of a pawnee and provides that in case of
default by the pawner the pawnee has (1) the right to sue upon the debt and to
retain the goods as collateral security and (2) to sell the goods after
reasonable notice of the intended sale to the pawner. Once the pawnee by virtue
of his right under Section 176 sells the goods the right of the pawner to
redeem them is of course extinguished. But as aforesaid the pawnee is bound to
apply the sale proceeds towards satisfaction of the debt and pay the surplus,
if any, to the pawner."
the Bank of Bihar vs. State of Bihar and
others (1971 Suppl. SCR 299) the law is set down thus:
to the Statement in Halsbury's Laws of England "pawn" has been
described as a security where by contract a deposit of goods is made a security
for a debt and the right to the property vests in the pledgee so far as is
necessary to secure the debt; in this sense it is intermediate between a simple
lien and a mortgage which wholly passed the property in the things conveyed.
"The pawnee has a special property or special interest in the thing
pledged, while the general property therein continues in the owner. That
special property or interest exists so that the pawnee can compel payment of
the debt or can sell the goods when the right to do so arises. This special
property or interest is to be distinguished from the mere right of detention which
the holder of a lien possesses, in that it is transferable in the sense that a pawnee
may assign or pledge his special property or interest in the goods."
"Where judgment has been obtained against the pawnor of goods and
execution has issued thereon, the sheriff cannot seize the goods pawned unless
he satisfied the claim of the panwee". (based mainly on Rogers vs. Kennay (1846 (9) Q.B. 592).
"On the bankruptcy of the pawnor the pawnee is a secured creditor in the
bankruptcy with respect to things pledged before the date of the receiving
order and without notice of a prior available act of bankruptcy". (Halsbury's
Laws of England 3rd Edn. Vol.29 p.222) It has not
been shown how the law in India is in
any way different from the English law relating to the rights of the pawnee vis-`-vis
other unsecured creditors of the pawnor.
judgment the High Court is in error in considering that the rights of the pawnee
who had parted with money in favour of the pawnor on the security of the goods
can be defeated by the goods being lawfully seized by the Government and the
money being made available to other creditors of the pawnor without the claim
of the pawnee being fully satisfied. The pawnee has special property and a lien
which is not of ordinary nature on the goods and so long as his claim is not
satisfied no other creditor of the pawnor has any right to take away the goods
or its price.
the goods had been seized by the Government it was bound to pay the amount due
to the plaintiff and the balance could have been made available to satisfy the
claim of other creditors of the pawner. But by a mere act of lawful seizure the
Government could not deprive the plaintiff of the amount which was secured by
the pledge of the goods to it. As the act of the Govenrment resulted in
deprivation of the amount to which the plaintiff was entitled it was bound to
reimburse the plaintiff for such amount which the plaintiff in ordinary course
would have realized by sale of goods pledged with it on the pawnor making a
default in payment of debt.
approach of the trial court was unexceptionable. The plaintiff's right as a pawnee
could not be extinguished by the seizure of the goods in its possession
inasmuch as the pledge of the goods was not meant to replace the liability
under the cash credit agreement. It was intended to give the plaintiff a
primary right to sell the goods in satisfaction of the liability of the pawnor.
The Cane Commissioner who was an unsecured creditor could not have any higher
rights than the pawnor and was entitled only to the surplus money after
satisfaction of the plaintiff's dues." (emphasis supplied)
has to be noticed that the Cane Commissioner was held to be an unsecured creditor,
he could not have any higher right than the pawnor and was entitled only to the
surplus money after satisfaction of the pawnee's dues.
Karnataka Pawnbroker's Association and others vs. State of Karnataka and others (1998 (7) SCC 707) this
Court summed up the position as under:
cannot be and it is not disputed that the pawnbroker has special property
rights in the goods pledged, a right higher than a mere right of detention of
goods but a right lesser than general property right in the goods. To put it
differently, the pawnor at the time of the pledge not only transfers to the pawnee,
the special right in the pledge but also passes on his right to transfer the
general property right in the pledge in the event of the pledge remaining
unredeemed resulting in the sale of the pledge by public auction through an
approved auctioneer. The position being what is stated above, the natural
consequence will be that it is the pawnee who holds not only the absolute
special property right in the pledge but also the conditional general property
interest in the pledge, the condition being that he can pass on that general
property only in the event of the pledge being brought to sale by public
auction in accordance with the Act and the Rules framed thereunder."
The Act there referred was the Karnataka Sales Tax Act and the question that
fell for decision was whether the pawnee, the pawnbroker, on sale could be
considered to be a dealer, liable to pay sales tax under the Sales Tax Act.
Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and others (2000 (5) SCC
694) the position was reiterated in the following words:
the Crown's preferential right to recovery of debt over other creditors is
confined to ordinary or unsecured creditors.
common law of England or the principles of equity and
good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts
over a mortgagee or pledgee of goods or a secured creditor. It is only in cases
where the Crown's right and that of the subject meet at one and the same time
that the Crown is in general preferred. Where the right of the subject is
complete and perfect before that of the King commences, the rule does not
apply, for there is no point of time at which the two rights are at conflict,
nor can there be a question which of the two ought to prevail in a case where
one, that of the subject, has prevailed already. In Giles vs. Grover (1832
(131) ER 563 : 9 Bing 128) it has been held that the Crown has no precedence
over a pledgee of goods. In Bank of Bihar vs. State of Bihar (supra) the
principle has been recognised by this Court holding that the rights of the pawnee
who has parted with money in favour of the pawnor on the security of the goods
cannot be extinguished even by lawful seizure of goods by making money available
to other creditors of the pawnor without the claim of the pawnee being first
fully satisfied. Rashbehary Ghose states in Law of Mortgages (Tagore Law
Lectures, 7th Edn. P. 386) "It seems a government debt in India is not entitled to precedence over
a prior secured debt."
may be noted that even the Crown's preferential right or a Crown debt was held
to be subservient to the rights of a pawnee.
O. Konavalov vs. Commander, Coast Guard Region and others (2006 (4) SCC 620)
this Court held that the lien of a pawnee traceable to Sections 172, 173 and
176 of the Contract Act is capable of satisfaction from property in the hands
of the Government obtained even by lawful seizure.
Court followed the views expressed in the decision in Bank of Bihar vs. State
of Bihar (supra).
Industries Ltd. (1987 (2) SCC 588) a direction was made for payment of the
workers dues by stating that such dues will have priority over other banks and
financial institutions. On going though the facts, it is seen that it was a
case where proceeding for liquidation of the company was going on and obviously
Section 529 of the Companies Act was attracted. Moreover, it is not seen that
the rights of a pawnee vis-`-vis the rights of the workmen is discussed. Since a
liquidation had intervened there, which is not the case here, the said decision
cannot be of any assistance to support the order passed by the High Court. In
fact, in Workers of M/s (1987 Suppl. SCC 462) rendered while clarifying the
earlier order, it was stated that the earlier order of the Court was made under
peculiar circumstances obtaining in the case and was not to be taken as a
precedent. Hence, even apart from the distinction, no value as a precedent can
be attached to that decision.
State of M.P. vs. Jaura Sugar Mills Ltd. And others (supra) dealing with the
Madhya Pradesh Sugar Cane (Regulation and Supply) Act, it was only held that
the Cane Commissioner having power to compel the cane growers to supply cane to
the factory, has incidental power and is duty bound to ensure payment of the
price of the sugarcane supplied by the sugarcane growers. With respect, this
decision does not enable us to adjudge the rights of a pawnee on the sale of
the pawned goods or alter the status of the Cane Commissioner or the cane
grower from only that of an unsecured creditor as recognised in Bank of Bihar
The decision in Textile Labour Association and another vs. Official Liquidator
and another (2004 (9) SCC 741) was a case of liquidation and was a case to
which Section 529 and 529A of the Companies Act were attracted. The said
decision is also of no help in the case on hand since a liquidation has not
intervened in the present case.
The decision in Rajasthan State Financial Corporation and another vs. Official
Liquidator and another (2005 (8) SCC 190) is also of no help since that was
also a case where the question was the effect of Section 529 and 529A of the
Companies Act on the power of the Debt Recovery Tribunal to sell the assets of
the entity under winding up.
Thus, going by the principles governing the matter, propounded by this Court
there cannot be any doubt that the rights of the appellant-bank over the pawned
sugar had precedence over the claims of the Cane Commissioner and that of the
workmen. The High Court was, therefore, in error in passing an interim order to
pay parts of the proceeds to the Cane Commissioner and to the Labour
Commissioner for disbursal to the cane growers and to the employees. There is
no dispute that the sugar was pledged with the appellant bank for securing a
loan of the first respondent and the loan had not been repaid. The goods were
forcibly taken possession of at the instance of the revenue recovery authority
from the custody of the pawnee, the appellant-bank. In view of the fact that
the goods were validly pawned to the appellant bank, the rights of the
appellant-bank as pawnee cannot be affected by the orders of the Cane
Commissioner or the demands made by him or the demands made on behalf of the
workmen. Both the Cane Commissioner and the workmen in the absence of a
liquidation, stand only as unsecured creditors and their rights cannot prevail
over the rights of the pawnee of the goods.
are also of the view that pending the writ appeals, the High Court ought not to
have passed such an interim order of consequence especially in the light of the
legal principles settled by this Court. The order of the High Court, therefore,
cannot be sustained and calls for interference.
We, therefore, allow these appeals and set aside the impugned order of the High
Court, directing payment out of parts of the sale proceeds to the Labour
Commissioner and to the Cane Commissioner. We hold that the appellant as the pawnee,
is entitled to the amount in satisfaction of its debt to secure which, the
goods had been pawned and to appropriate the sale proceeds towards the debt due
and only if there is surplus, to make it available for disbursal to the Cane
Commissioner and to the Labour Commissioner. In the circumstances, we direct
the parties to suffer their respective costs.