Maharashtra
State Co-Op. Bank Ltd. Vs. Assistant P.F. Commr. & ANR. [2009] INSC 1636 (8
October 2009)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.6893 OF
2009 (Arising out of S.L.P. (C) No.15243 of 2007) Maharashtra State
Co-operative Bank Ltd. ... Appellant Versus The Assistant Provident Fund
Commissioner ... Respondents and others WITH CIVIL APPEAL NO.6894 OF 2009
(Arising out of S.L.P. (C) No.20736 of 2007) Maharashtra State Co-operative
Bank Ltd. ... Appellant Versus The Employees' Provident Fund Organization ...
Respondents and others J U D G M E N T G.S. Singhvi, J.
1.
Leave granted.
2.
Whether the sugar bags pledged by Kannad Sahakari Sakhar Karkhana
Ltd. and Gangapur Sahakari Sakhar Karkhana Ltd. in favour of the appellant-bank
as security for repayment of the loan together with interest could be attached
and sold for realization of the dues of provident funds etc. payable by the
employer i.e., the management of the Sugar Mills under the Employees' Provident
Funds and Miscellaneous Provisions Act, 1952 (for short `the Act') is the
question which arises for determination in these appeals filed against order
dated 29.6.2007 passed by the Division Bench of the Bombay High Court in Civil
Application Nos.1680 and 1681 of 2007 in Writ Petition No.6824/2005 and order
dated 19.7.2007 passed in Civil Application No.245/2007 in Letters Patent
Appeal No.28/2004.
3.
We shall first notice the facts from the record of the appeal
arising out of S.L.P.(C ) No.15243/2007.
4.
During crushing season 2000-2001, the appellant advanced loan of
Rs.4000 lacs to Kannad Sahakari Sakhar Karkhana Limited (hereinafter described
as `the Sugar Mill'). For securing repayment of the loan and interest, the
management of the Sugar Mill executed necessary documents including deed of
pledge dated 5.3.2001, the relevant portions of which are extracted below:-
"We, the undersigned, Kannad Sahakari Sakhar Karkhana Ltd., Tal. Kannad,
Aurangabad, member of Maharashtra State Co-operative Bank Limited
(Incorporating the Vidarbha Co-operative Bank Ltd.) hereinafter referred to as
"the said Bank"
agree to
take a loan from the said Bank on the pledge of stocks/goods/commodities on the
following terms and conditions. The credit limit will be Rs.400000000 and its
period will be upto 31.10.2001.
1. The
stocks/goods/commodities which we have at present placed in the custody of the
said Bank as security or which we might so place from time to time will remain
in the sole custody of the said Bank and whatever action the said Bank will
take for indicating its custody shall be agreeable to us.
3. If it
is necessary to hire a godown, we undertake to hire the godown in the name of
the said Bank and to pay the rent from time to time.
4. We
undertake to insure the stocks/goods/commodities for their full value with an
Insurance Company approved by the said Bank and will get the policy issued in
the name of the said Bank.
5. If for
any reason the godown is required to be changed or repaired, we undertake to
bear the expenses in that connection.
6. We
undertake to repay the principal of the loan with interest and all expenses due
by us by _____ as stipulated in para (2) hereof if the period, be extended by
the said Bank before the expiry of the extended period.
7. The
loan shall bear interest at ____ percent per annum. If the rent of the godown,
the expenses in connection with insurance and other expenses if any not paid by
us, the same shall be debited to our loan account and shall bear interest at
the same rate. This interest shall be payable with half yearly rests on 30th
June and 31st December or earlier immediately when the stocks/goods/commodities
are relieved.
8. Over
and above the aforesaid dues, if any other amount is due to the said Bank by us
exclusively or in partnership with anybody else, we agree that the
stocks/goods/commodities kept in the custody of the said Bank will also be
treated as security for such amount due by us.
10. We
shall not in any way hold the said Bank responsible for the weight, quality,
conditions or safety of the stocks/goods/commodities given into its custody. We
shall hold ourselves responsible for any shortage, damage or shrinkage that may
arise by any cause whatsoever.
13. If
and when there is insecurity due to local riots or civil commotion, etc. we
undertake to insure the stocks/goods/commodities against any damage or loss by
such riots or civil commotion.
If we
fail to do so, they said Bank shall so insure the stocks/goods/commodities for
and on our behalf and shall be entitled to debit the cost thereof to our
account.
15.
Though by this Agreement, the date of repayment of the loan has been fixed as
aforesaid, the said Bank shall treat the loan as demand we undertake to repay
the same as soon as the said Bank shall make a demand or the said Bank shall be
at full liberty to recover all the dues payable by us.
16. In
the event of breach of the aforesaid conditions and or if we fail to repay the
loan within 24 hours, if so required by the said Bank, it shall have the full
right to recover its amount by sale of the stocks goods commodities by public
auction or private treaty (though they said Bank is not bound so to sell the
stocks/goods/commodities). On receipt of the Account of sale under the
signature of the Manager, Accountant or other officer of the said Bank duly
authorized we shall acknowledge its correctness. If the proceeds of the sale do
not fully meet the loan due by us interest or other expenses, we undertake to
pay the balance so remaining with interest."
5.
On the same day i.e., 5.3.2001, the management of the Sugar Mill
also executed promissory note for payment of Rs.40 crores with interest @
15.50% with half yearly rests.
6.
Though, the appellant has not given the details of the dues of
provident fund payable by the employer, a reading of the document marked Ex. A
(pages 119-122 of the SLP paper book) shows that the Assistant Provident Fund
Commissioner, Aurangabad (for short `the Assistant Commissioner') passed order
dated 29.9.2003 under Section 7A of the Act whereby he held the employer liable
to pay Rs.1,75,10,477/- towards EPF contributions, EPF administrative charges,
EDLI contributions, EDLI Ins./administrative charges and directed it to pay the
amount with interest @ 12% within 10 days. As the employer failed to comply
with that order, the Assistant Provident Fund Commissioner and Recovery
Officer, Employees' Provident Fund, Sub-Regional Office, Aurangabad
(hereinafter referred to as `the Recovery Officer') issued warrant of
attachment dated 11.3.2004 under Section 8B of the Act for recovery of
Rs.3,85,21,734/- which included 12% interest payable in accordance with Rule 5 of
the Second Schedule (Part I) of the Income-tax Act, 1961 read with Section 8G
of the Act. The warrant of attachment was executed by the Enforcement Officer
on 26.3.2004 by preparing an inventory of the sugar bags lying in the godowns
of the Sugar Mill and affixing paper seals on the same.
7.
The appellant challenged the warrant of attachment and
consequential action taken by the Enforcement Officer in Writ Petition
No.6824/2005, mainly on the ground that in view of the deed of pledge executed
by the management of the Sugar Mill, the sugar bags which were lying under its
lock and key, could not have been attached for realization of the dues of
provident fund etc. During the pendency of the writ petition, the Assistant
Commissioner filed Civil Application No.2739/2006 for sale of the sugar bags.
At the hearing of that application, learned counsel appearing for the
appellant-bank referred to the orders passed in Writ Petition No.3413/2005 and
connected cases for conducting joint auction of the attached goods i.e., sugar
bags. After taking note of his submission, the Division Bench of the High Court
passed order dated 1.12.2006, the relevant portions of which are as under:-
"We accordingly allow this application and direct that the sugar bags
attached by the petitioner as well as the Assistant Provident Fund Commissioner
shall be jointly auctioned and the sale proceeds shall be deposited with the
Registrar of this Court. The successful bidder will draw a Demand Draft or a
Banker's Cheque in the name of the Registrar General of this Court.
It is
further ordered that the auction sale undertaken jointly, shall be completed
within a period of three months by floating public tenders calling for bids and
by accepting tender of the highest bidder.
Once the
amount is deposited with the Registrar of this Court, liberty to apply for
withdrawal of the said amount."
8.
In compliance of the aforementioned order, the sugar bags lying in
the godowns of the Sugar Mill were auctioned for a sum of Rs.9,24,08,254/-.
Thereafter, the Assistant Commissioner filed Civil Application No.1680/2007 for
permission to withdraw a sum of Rs.7,77,46,511/- towards the dues of provident
fund etc. by asserting that in addition to Rs.1,75,10,477/- payable under
Section 7A with interest @ 12%, the employer is liable to pay Rs.6,02,36,034/-
in terms of order dated 27.3.2007 passed under Section 14B read with Section 7Q
of the Act.
9.
It appears that during the pendency of the litigation, the
Assistant Commissioner passed another order whereby he attached the bank
account and movable and immovable properties of the Sugar Mill along with
69,000 sugar bags. Therefore, the management of the Sugar Mill filed Civil
Application No.1681/2007 with the prayer that attachment effected by the
Assistant Commissioner may be vacated.
10.
By the impugned order, the High Court disposed of both the
applications and issued various directions including the following:- "(a)
Out of the amount of Rs.9,24,08,254/-, the amount of Rs.4,20,67,446/-
(Principal amount Rs.1,75,10,477/- plus interest Rs.2,45,56,969/-) be paid to
the Assistant Provident Fund Commissioner so as to appropriate towards the
provident fund dues of the workers of the sugar factory.
(b) Out
of the remaining amount, the amount of Rs.1,46,61,743/- shall be paid to the
MSC Bank which MSC Bank shall appropriate towards the dues of the Sugar
Factory.
(c) The
remaining amount of Rs.3,56,79,065/- be deposited initially for a period of 1
year with the MSC Bank in the name of the Registrar General, High Court, Bombay
for a period of 1 year. If within the period of 1 year, the appeal filed by the
Petitioner with the Appellate Tribunal under the Provident Fund Act is not
disposed of, then the Registrar General will re-deposit and/or renew the said
amount on yearly basis with MSC Bank till final disposal of the said appeal.
(d) The
information in respect of the number, pendency or disposal of the Appeal shall
be given by the Sugar Factory to the Registrar General when the said Appeal is
disposed of.
(e) In
case the said appeal filed by the Sugar Factory is dismissed by the Appellate
authority, then the amount of Rs.3,56,79,065/- will have to be transferred to
the Assistant Provident Fund Commissioner and the Registrar General is hereby
directed, accordingly, to transfer it.
(f) In
case the appeal is allowed and thereby the sugar factory becomes entitled to
the amount of Rs.3,56,79,065/-, then the MSC Bank is at liberty to appropriate
the said amount towards the dues of the Sugar Factory.
(g) In
view of the above directions and the disbursement of the amount, the order
passed by the Assistant Provident Fund Commissioner attaching the assets, Bank
Accounts and sugar bags etc. of the Sugar Factory is hereby quashed and set
aside and the Sugar Factory is at liberty to deal with the said assets in
accordance with their own Resolution and decisions keeping in mind the directions."
11.
We may now notice some facts from the record of the other appeal.
12.
The appellant advanced Rs.2000 lacs to Gangapur Sahakari Sakhar
Karkhana Ltd. during crushing season 2002-
03. For
securing the payment of the loan, the management of the Sugar Mill executed
three deeds on 2.1.2003, 6.2.2003 and 4.4.2003 and pledged the sugar bags lying
in the godowns. Simultaneously, three promissory notes were executed for
payment of the amounts specified therein with interest at the rate of 13.5 per
cent per annum with half yearly rests. The terms and conditions of these deeds
are similar to deed of pledge dated 5.3.2001 executed by the management of
Kannad Sahakari Sakhar Karkhana Ltd. On account of failure of the employer to
pay the dues of provident fund etc., the competent authority passed orders
under Sections 7A, 7Q and 14B of the Act and held it liable to pay total sum of
Rs.9,11,72,892/- towards the dues of provident fund, interest and damages.
After some time, the Assistant Commissioner issued warrant of attachment dated
15.9.2003 which was duly executed by the Enforcement Officer on 22.9.2003.
13.
The appellant challenged the warrant of attachment in Writ
Petition No. 3656/2003, which was dismissed by the learned Single Judge of the
High Court (Aurangabad Bench) vide his order dated 3.10.2003 by relying upon
the judgments of the Kerala High Court in Recovery Officer and Assistant
Provident Fund Commissioner v. Kerala Financial Corporation (2002) 3 LLJ 643
Kerala and of this Court in A.P. State Financial Corporation v. Official
Liquidator (2000) 7 SCC 291. The letters patent appeal preferred by the
appellant-bank was transferred to the Principal Seat of the High Court at
Mumbai. During the pendency of the letters patent appeal, the Assistant Commissioner
filed Civil Application No.21/2006 for sale of the sugar bags lying in the
godown of the employer. By an order dated 18.7.2006, the High Court granted the
prayer of the Assistant Commissioner and directed that the sale amount be
deposited with the Registrar General. Thereafter, the Assistant Commissioner
filed Civil Application No.245/2007 for permission to withdraw the amount lying
deposited with the Registrar General of the High Court. The same was disposed
of by the Division Bench vide order dated 19.7.2007, the operative portion of
which reads as under:- "In view of the fact that this Court has taken a
consistent view that the amounts recovered from sugar factories by disposing of
sugar against recovery made by co-operative banks for the secured creditors can
be appropriated towards payment of Provident Fund dues, we find no reason to
take a different stand, and allow the application in terms of prayer clause
(a), with no order as to costs."
14.
Shri Ashok H. Desai, learned senior counsel appearing for the
appellant assailed the impugned orders and argued that the sugar bags lying in
the godowns of the Sugar Mills could not have been attached and sold at the
instance of the Assistant Commissioner for realization of the dues of provident
fund etc. because the same had already been pledged with the appellant-bank.
Learned senior counsel relied upon the judgments of this Court in Karnataka
Pawnbrokers' Association v. State of Karanataka (1998) 7 SCC 707, Central Bank
of India v. Siriguppa Sugars & Chemicals Ltd. (2007) 8 SCC 353, and argued
that even though under Section 11(2) of the Act, the amount due from an
employer is treated as first charge on the assets of the establishment, the
same cannot have priority or precedence over the dues of the appellant-bank,
the payment of which is secured by the deeds of pledge executed by the
management of the Sugar Mills. Shri Desai referred to various clauses of the
deeds of pledge and submitted that for all practical purposes, the
appellant-bank had become owner of the sugar bags and the Recovery Officer did
not have the jurisdiction, power or authority to attach the same. Learned
senior counsel emphasized that the term "assets" used in Section
11(2) of the Act means unencumbered property of the establishment and argued
that as the sugar bags pledged with the appellant-bank had become its property,
the Recovery Officer was not entitled to attach the same for realizing the dues
of provident fund etc. In support of this argument, Shri Desai placed reliance
on paragraphs 67 and 73 of the judgment of this Court in Transcore v. Union of
India (2008) 1 SCC 125.
Another
argument of the learned senior counsel is that, at best, the amount determined
under Section 7A can be treated as first charge on the assets of the establishment
but the interest payable under Section 7Q and damages levied under Section 14B
cannot be recovered by invoking Section 11(2) of the Act.
15.
Shri R.C. Kalra and Ms. Malvika Trivedi, learned counsel for the
respondents argued that notwithstanding execution of the deeds of pledge by the
management of Sugar Mills in favour of the appellant-bank, the sugar bags
continued to be the property of the Sugar Mills and the same could be sold for
realization of the dues of provident fund. Learned counsel submitted that the
expression `any amount due' appearing in Section 11(2) includes the amount
determined under Section 7A, interest payable on such amount in terms of
Section 7Q and damages levied under Section 14B. Learned counsel then argued
that by virtue of the deeming provision and non obstante clause contained in
Section 11(2), any amount due from an employer in respect of the employees'
contribution or employer's contribution is the first charge on the assets of
the establishment and the same is required to be paid in priority qua all other
debts. Ms. Malvika Trivedi pointed out that notice in the SLPs filed by the
appellant was issued primarily in view of the assertions contained therein that
similar issue is under consideration in S.L.P.(C) No.95 of 2005 - Central Bank
of India v. State of Kerala and others and submitted that the appeals are
liable to be dismissed in view of the judgment titled Central Bank of India v.
State of Kerala (2009) 4 SCC 94.
16.
We have considered the respective submissions. In pre-independence
era, some of the big industrial employers introduced schemes of provident funds
for welfare of their workers. However, the workers of small industrial
establishments did not get similar benefits because employers of those
establishments did not introduce voluntary schemes of provident funds. The
framers of the Constitution were very much alive to the plight of the working
class and particularly the unorganized labour employed in factories and other
establishments. They were also conscious of the fact that the goals of justice
- social, economic and political and equality of status and of opportunity
proposed to be incorporated in the preamble to the Constitution will remain
illusory for weaker sections of society unless the State takes affirmative
legislative and administrative measures for ameliorating the conditions of
those sections including the workers employed in factories etc. Therefore,
specific provisions were incorporated in Part IV of the Constitution with the
title "Directive Principles of State Policy" casting an obligation
upon the State to apply these principles in making laws. Article 38 which has
been renumbered as clause (1) thereof by the Constitution (Forty-fourth
Amendment) Act, 1978 declares that the State shall strive to promote the
welfare of the people by securing and protecting, as effectively as it may, a
social order in which justice, social, economic and political, shall inform all
the institutions of national life. Clause (2) of Article 38 mandates the State
to strive to minimize the inequalities in income, and endeavour to eliminate
inequalities in status, facilities and opportunities, not only amongst
individuals but also amongst groups of people residing in different areas or
engaged in different avocations. Article 43 casts a duty on the State to make
efforts to secure by suitable legislation or economic organization or in any
other way, to all workers, agricultural, industrial or otherwise, work, a
living wage, conditions of work ensuring a decent standard of life and full
enjoyment of leisure and social and cultural opportunities, and, in particular,
social opportunities.
The State
is also required to make special endeavour to promote cottage industries on an
individual or cooperative basis in rural areas.
17.
Soon after enforcement of the Constitution, the Government of
India promulgated the Employees Provident Funds Ordinance on 15.11.1951, which
was replaced by the Act, which belongs to the family of legislations enacted by
the Parliament in furtherance of the mandate of Articles 38 and 43 of the
Constitution and is intended to give social security to the workers employed in
the factories and other establishments. The Act provides for institution of
provident funds, pension fund and deposit-linked insurance fund in factories
and other establishments. It requires the employers of the factories and
specified establishments to deduct certain amount from the wages payable to the
employees and also make contribution to various funds, which are administered by
the Central and Regional Provident Fund Commissioners. Section 2(aa) of the Act
defines the term "authorized officer" to mean the Central Provident
Fund Commissioner, Additional Central Provident Fund Commissioner, Deputy
Provident Fund Commissioner, Regional Provident Fund Commissioner or such other
officer as may be authorised by the Central Government, by notification in the
Official Gazette. The term "Fund" has been defined in Section 2(h) to
mean the provident fund established under a Scheme. The term "Recovery
Officer" has been defined in Section 2(kd) to mean any officer of the
Central Government, State Government or the Board of Trustees constituted under
Section 5A, who may be authorised by the Central Government, by notification in
the Official Gazette, to exercise the powers of a Recovery Officer under the
Act. Section 5(1) lays down that the Central Government may, by notification in
the Official Gazette, frame a Scheme to be called the Employees' Provident
Funds Scheme for the establishment of provident funds under this Act for
employees or for any class of employees and specify the establishments or class
of establishments to which they said Scheme shall apply. This section further
lays down that soon after framing of the Scheme, a Fund shall be established in
accordance with the provisions of the Act and the Scheme. Section 6 speaks of
the contribution required to be made by the employer and employees to the Fund.
Section 6A(1) postulates framing of Employees' Pension Scheme for the purpose
of providing superannuation pension, retiring pension or permanent total
disablement pension to the employees of any establishment or class of
establishments to which this Act applies and widow or widower's pension,
children pension or orphan pension payable to the beneficiaries of such
employees.
Section
6A(2) lays down that notwithstanding anything contained in Section 6, there
shall be established, as soon as may be after framing of the Pension Scheme, a
pension fund to which a specified sum should be paid from the employer's
contribution under Section 6. Section 6C(1) postulates framing of Employees'
Deposit-linked Insurance Scheme for the purpose of providing life insurance
benefits to the employees of any establishment or class of establishments to
which the Act applies. Section 6C(2) provides for establishment of a
Deposit-linked Insurance Fund into which the employer is required to pay a
specified amount in respect of every employee. Section 7A empowers the
competent authority to decide dispute regarding applicability of the Act to an
establishment as also the amount due from any employer under the provisions of
the Act, the Scheme or the Pension Scheme or the Insurance Scheme, as the case
may be. Section 7Q declares that the employer shall be liable to pay simple
interest at the rate of twelve per cent per annum or at such higher rate as may
be specified in the Scheme on any amount due from him under the Act from the
date on which the amount has become so due till the date of its actual payment.
Proviso to this Section lays down that higher rate of interest specified in the
Scheme shall not exceed the lending rate of interest charged by any scheduled
bank. Section 8 specifies the mode of recovery of moneys due from employers.
Section 8B lays down that where any amount is in arrear under Section 8, the
authorized officer may issue a certificate to the Recovery Officer specifying
therein the amount of arrears and on receipt of the certificate, the Recovery
Officer shall proceed to recover the particular amount from the establishment
or the employer by adopting one or more of the modes specified in that section.
Section 8F specifies other modes of recovery. Section 11 speaks of priority of
payment of contributions over other debts. Section 14B provides for recovery of
damages. Some of these provisions which have direct bearing on the decision of
these appeals are reproduced below:
8. Mode
of recovery of moneys due from employer - Any amount due-- (a) from the
employer in relation to an establishment to which any Scheme or the Insurance
Scheme applies in respect of any contribution payable to the Fund or, as the
case may be, the Insurance Fund damages recoverable under section 14B,
accumulations required to be transferred under sub-section (2) of section 15 or
under sub-section (5) of section 17 or any charges payable by him under any
other provision of this Act or of any provision of the Scheme or the Insurance
Scheme; or (b) from the employer in relation to an exempted establishment in
respect of any damages recoverable under section 14B or any charges payable by
him to the appropriate Government under any provision of this Act or under any
of the conditions specified under section 17 or in respect of the contribution
payable by him towards the Pension Scheme under the said section 17.
many, if
the amount is in arrear, be recovered in the manner specified in sections 8B to
8G.
8B. Issue
of certificate to the Recovery Officer.
(1) Where
any amount is in arrear under section 8, the authorised officer may issue, to the
Recovery Officer, a certificate under his signature specifying the amount of
arrears and the Recovery Officer, on receipt of such certificate, shall proceed
to recover the amount specified therein from the establishment or, as the case
may be, the employer by one or more of the modes mentioned below:-- (a)
attachment and sale of the movable or immovable property of the establishment
or, as the case may be, the employer;
(b)
arrest of the employer and his detention in prison;
(c)
appointing a receiver for the management of the movable or immovable properties
of the establishment or, as the case may be, the employer:
Provided
that the attachment and sale of any property under this section shall first be
effected against the properties of the establishment and where such attachment
and sale is insufficient for recovering the whole of the amount of arrears
specified in the certificate, the Recovery Officer may take such proceedings
against the property of the employer for recovery of the whole or any part of
such arrears.
(2) The
authorised officer may issue a certificate under sub-section (1),
notwithstanding that proceedings for recovery of the arrears by any other mode
have been taken.
8F. Other
modes of recovery.
(1)
Notwithstanding the issue of a certificate to the Recovery Officer under
section 8B, the Central Provident Fund Commissioner or any other officer
authorised by the Central Board may recover the amount by any one or more of
the modes provided in this section.
(2) xxx
xxx xxx xxx (3)(i) to (ix) xxx xxx xxx (x) If the person to whom a notice under
this sub-section is sent fails to make payment in pursuance thereof to the
Central Provident Fund Commissioner or the officer so authorized he shall be
deemed to be an employer in default in respect of the amount specified in the
notice and further proceedings may be taken against him for the realization of
the amount as if it were an arrear due from him, in the manner provided in
sections 8B to 8E and the notice shall have the same effect as an attachment of
a debt by the Recovery Officer in exercise of his powers under section 8B.
(4) xxx
xxx xxx xxx (5) The Central Provident Fund Commissioner or any officer not
below the rank of Assistant Provident Fund Commissioner may, if so authorised
by the Central Government by general or special order, recover any arrears of
amount due from an employer or, as the case may be, from the establishment by
distraint and sale of his or its movable property in the manner laid down in
the Third Schedule to the Income-tax Act, 1961 (43 of 1961).
8G.
Application of certain provisions of Income- tax Act - The provisions of the
Second and Third Schedules to the Income-tax Act, 1961 (43 of 1961) and the
Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to
time, shall apply with necessary modifications as if the said provisions and
the rules referred to the arrears of the amount mentioned in section 8 of this
Act instead of to the Income-tax;
Provided
that any reference in the said provisions and the rules to the
"assessee" shall be construed as a reference to an employer as
defined in this Act.
11.Priority
of payment of contributions over other debts.
(l) Where
any employer is adjudicated insolvent or, being a company, an order for winding
up is made, the amount due-- (a) from the employer in relation to an
establishment to which any Scheme or the Insurance Scheme applies in respect of
any contribution payable to the Fund or, as the case may be, the Insurance Fund,
damages recoverable under section 14B, accumulations required to be transferred
under sub-section (2) of section 15 or any charges payable by him under any
other provision of this Act or of any provision of the Scheme or the Insurance
Scheme; or (b) from the employer in relation to an exempted establishment in
respect of any contribution to the provident fund or any insurance fund (in so
far it relates to exempted employees), under the rules of the provident fund or
any insurance fund, any contribution payable by him towards the Pension Fund
under sub-section (6) of section 17, damages recoverable under section 14B or
any charges payable by him to the appropriate Government under any provision of
this Act or under any of the conditions specified under section 17, shall,
where the liability therefor has accrued before the order of adjudication or
winding up is made, be deemed to be included among the debts which under
section 49 of the Presidency-towns Insolvency Act, 1909 (3 of 1909), or under
section 61 of the Provincial
Insolvency Act, 1920 (5 of 1920) or under section 530
of the Companies Act, 1956 (1 of 1956) are to be paid in priority to all other
debts in the distribution of the property of the insolvent or the assets of the
company being wound up, as the case may be.
Explanation:
In this sub-section and in section 17, "insurance fund" means any
fund established by an employer under any scheme for providing benefits in the
nature of life insurance to employees, whether linked to their deposits in
provident fund or not, without payment by the employees of any separate
contribution or premium in that behalf.
(2)
Without prejudice to the provisions of sub- section (1), if any amount is due
from an employer whether in respect of the employees' contribution (deducted
from the wages of the employee) or the employer's contribution, the amount so
due shall be deemed to be the first charge on the assets of the establishment,
and shall, notwithstanding anything contained in any other law for the time
being in force, be paid in priority to all other debts.
14B.
Power to recover damages.
Where an
employer makes default in the payment of any contribution to the Fund, the
Pension Fund or the Insurance Fund or in the transfer of accumulations required
to be transferred by him under sub-section (2) of section 15 or sub- section
(5) of section 17 or in the payment of any charges payable under any other
provision of this Act or of any Scheme or Insurance Scheme or under any of the
conditions specified under section 17, the Central Provident Fund Commissioner
or such other officer as may be authorised by the Central Government, by
notification in the Official Gazette, in this behalf may recover from the employer
such damages, not exceeding the amount of arrears, as may be specified in the
scheme:
Provided
that before levying and recovering such damages, the employer shall be given a
reasonable opportunity of being heard:
Provided
further that the Central Board may reduce or waive the damages levied under
this section in relation to an establishment which is a sick industrial company
and in respect of which a scheme for rehabilitation has been sanctioned by the
Board for Industrial and Financial Reconstruction established under section 4
of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986),
subject to such terms and conditions as may be specified in the Scheme.
18.
An analysis of the above provisions shows that for providing
financial benefits to the workers who contribute to the growth of the
industries and industrialization of the country, the legislature has made
provision for framing of various schemes under Sections 5(1), 6A(1) and 6C(1)
and establishment of Funds under Sections 5(1), 6A(2) and 6C(2). With a view to
ensure that the employers religiously comply with the mandate of provisions
enacted for benefit of the workers, the legislature has not only provided for
imposition of penalty under Sections 14, 14A, 14AA and damages under Section
14B, but also made comprehensive provisions for recovery of the dues by way of
attachment and sale of movable or immovable property of the establishment or
the employer, as the case may be. Section 8 lays down that if the amount is in
arrear, the same can be recovered in the manner specified in Sections 8B to G.
Section
8B provides for issue of certificate by the authorised officer in respect of
the amount due to the Recovery Officer so as to enable him to recover the
amount specified therein by attachment and sale of movable or immovable
property of the establishment or the employer or by arrest of the employer and
his detention in prison or by appointing a receiver for the management of the
movable or immovable properties of the establishment or the employer, as the
case may be. Section 8F specifies other modes of recovery of any amount due
from the establishment or the employer. By Section 8G some of the provisions
contained in Income-tax Act, 1961 and the Income-tax (Certificate Proceedings)
Rules, 1962 have been made applicable to the arrears of the amount mentioned in
Section 8. Section 11 gives statutory priority to the payment of contributions
over other debts. The original Section 11 was renumbered as sub-section (1) by
an amendment made vide Act No.40 of 1973. This sub-section relates to priority
qua an employer who is adjudged insolvent or being a company an order of
winding up is made. It lays down that the amount due from the employer in
respect of any contribution payable to the Fund or, as the case may be, the
Insurance Fund, damages recoverable under Section 14B, accumulations required
to be transferred under Section 15(2) or any charges payable by him under any
other provision of the Act or the Scheme or the Insurance Scheme shall be paid
in priority to all other debts in the distribution of the property of the
insolvent or the assets of the company being wound up, as the case may be.
Sub-section (2), which was added to Section 11 by Act No.40 of 1973 contains a
non obstante clause and lays down that if any amount is due from the employer
whether in respect of the employees' contribution deducted from the wages of
the employee or the employer's contribution, the same shall be deemed to be the
first charge on the assets of the establishment and shall, notwithstanding
anything contained in any other law for the time being in force, be paid in
priority to all other debts. To put it differently, sub-section (2) of Section
11 not only declares that the amount due from the employer towards contribution
under the Act shall be treated as the first charge on the assets of the
establishment, but also lays down that notwithstanding anything contained in
any other law, such dues shall be paid in priority to all other debts. Section
14B empowers the Central Provident Fund Commissioner or such other officer as
may be authorized by the Central Government, by notification in the Official
Gazette to recover from the defaulting employer damages which shall not exceed
the arrears. First proviso to this section casts a duty on the concerned
officer to give the employer reasonable opportunity of hearing before imposing
and recovering damages. Second proviso thereto empowers the Central Board to
reduce or waive damages levied in relation to establishment which is a sick
industrial company and in respect of which a scheme for rehabilitation has been
sanctioned by the Board of Financial and Industrial Reconstruction.
19.
Since the Act is a social welfare legislation intended to protect
the interest of a weaker section of the society, i.e., the workers employed in
factories and other establishments, it is imperative for the courts to give a
purposive interpretation to the provisions contained therein keeping in view
the Directive Principles of State Policy embodied in Articles 38 and 43 of the
Constitution.
In this
context, we may usefully notice the following observations made by Krishna
Iyer, J. in Organo Chemical Industries v. Union of India (1979) 4 SCC 573:
"The
pragmatics of the situation is that if the stream of contributions were frozen
by employers' defaults after due deduction from the wages and diversion for
their own purposes, the scheme would be damnified by traumatic starvation of
the Fund, public frustration from the failure of the project and psychic
demoralisation of the miserable beneficiaries whey they find their wages
deducted and the employer get away with it even after default in his own
contribution and malversation of the workers' share. "Damages" have a
wider socially semantic connotation than pecuniary loss of interest on
non-payment when a social welfare scheme suffers mayhem on account of the
injury. Law expands concepts to embrace social needs so as to become
functionally effectual.
The
measure was enacted for the support of a weaker sector viz. the working class
during the superannuated winter of their life. The financial reservoir for the
distribution of benefits is filled by the employer collecting, by deducting
from the workers' wages, completing it with his own equal share and duly making
over the gross sums to the Fund. If the employer neglects to remit or diverts
the moneys for alien purposes the Fund gets dry and the retirees are denied the
meagre support when they most need it. This prospect of destitution demoralises
the working class and frustrates the hopes of the community itself. The whole
project gets stultified if employers thwart contributory responsibility and
this wider fall-out must colour, the concept of `damages' when the court seeks
to define its content in the special setting of the Act. For, judicial
interpretation must further the purpose of a statute. In a different context
and considering a fundamental treaty, the European Court of Human Rights, in
the Sunday Times Case, observed:
The Court
must interpret them in a way that reconciles them as far as possible and is
most appropriate in order to realise the aim and achieve the object of the
treaty.
A
policy-oriented interpretation, when a welfare legislation falls for
determination, especially in the context of a developing country, is sanctioned
by principle and precedent and is implicit in Article 37 of the Constitution
since the judicial branch is, in a sense, part of the State. So it is
reasonable to assign to "damages"
a larger,
fulfilling meaning."
20.
We shall now consider the question whether the provision contained
in Section 11(2) of the Act operates against other debts like mortgage, pledge,
etc. Answer to this question is clearly discernible from the plain language of
Section 11. The priority given to the dues of provident fund etc. in Section 11
is not hedged with any limitation or condition. Rather, a bare reading of the
section makes it clear that the amount due is required to be paid in priority
to all other debts. Any doubt on the width and scope of Section 11 qua other
debts is removed by the use of expression `all other debts' in both the sub-
sections. This would mean that the priority clause enshrined in Section 11 will
operate against statutory as well as non-statutory and secured as well as unsecured
debts including a mortgage or pledge. Sub-section (2) was designedly inserted
in the Act for ensuring that the provident fund dues of the workers are not
defeated by prior claims of secured or unsecured creditors. This is the reason
why the legislature took care to declare that irrespective of time when a debt
is created in respect of the assets of the establishment, the dues payable
under the Act would always remain first charge and shall be paid first out of
the assets of the establishment notwithstanding anything contained in any other
law for the time being in force. It is, therefore, reasonable to take the view
that the statutory first charge created on the assets of the establishment by
sub-section (2) of Section 11 and priority given to the payment of any amount
due from an employer will operate against all types of debts.
21.
The view we have taken on the interpretation of Section 11(2) is
in tune with a series of decisions of this Court in which the provisions
contained in different statutes giving priority to the dues of the State and
workers have been interpreted. In the first place, we may refer to some
decisions relating to dues of the State. In Builders Supply Corporation v.
Union of India 1965(2) SCR 289, the Constitution Bench considered the question
whether tax payable to the Union of India has priority over other debts. After
making reference to some judgments of the Bombay and Madras High Courts, the
Constitution Bench laid down the following propositions:
1. There
is a consensus of judicial opinion that the arrears of tax due to the State can
claim priority over private debts.
2. The
common law doctrine about priority of Crown debts which was recognised by
Indian High Courts prior to 1950 constitutes "law in force" within
the meaning of Article 372(1) and continues to be in force.
3. The
basic justification for the claim for priority of State debts is the rule of
necessity and the wisdom of conceding to the State the right to claim priority
in respect of its tax dues.
4. The
doctrine may not apply in respect of debts due to the State if they are
contracted by citizens in relation to commercial activities which may be
undertaken by the State for achieving socio-economic good. In other words,
where the welfare State enters into commercial fields which cannot be regarded
as an essential and integral part of the basic government functions of the
State and seeks to recover debts from its debtors arising out of such
commercial activities the applicability of the doctrine of priority shall be
open for consideration.
22.
In State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling
Corporation (1995) 2 SCC 19, a three-Judge Bench considered whether statutory
first charge created by Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 in
favour of the State will have priority over the debts of the bank which had
been secured by the borrower by creating mortgage of its factory and answered
the same in affirmative by making the following observations:
"Section
100 of the Transfer of Property Act deals with charges on an immoveable
property which can be created either by an act of parties or by operation of
law. It provides that where immoveable property of one person is made security
for the payment of money to another, and the transaction does not amount to a
mortgage, a charge is created on the property and all the provisions in the
Transfer of Property Act which apply to a simple mortgage shall, so far as may
be, apply to such charge. A mortgage on the other hand, is defined under
Section 58 of the Transfer of Property Act as a transfer of an interest in
specific immoveable property for the purpose of securing the payment of money
advanced or to be advanced as set out therein. The distinction between a
mortgage and a charge was considered by this Court in the case of Dattatreya
Shanker Mote v. Anand Chintaman Datar (1974) 2 SCC 799. The Court has observed
(at pages 806-807) that a charge is a wider term as it includes also a
mortgage, in that, every mortgage is a charge, but every charge is not a
mortgage. The Court has then considered the application of the second part of
Section 100 of the Transfer of Property Act which inter alia deals with a
charge not being enforceable against a bona fide transferee of the property for
value without notice of the charge. It has held that the phrase
"transferee of property" refers to the transferee of entire interest
in the property and it does not cover the transfer of only an interest in the
property by way of a mortgage.
In the
present case we have to consider whether the statutory first charge which is
created under Section 11-AAAA of the Rajasthan Sales Tax Act over the property
of the dealer or a person liable to pay sales tax and/or other dues under the
Rajasthan Sales Tax Act, is created in respect of the entire interest in the
property or only the mortgagor's interest in the property when the dealer has
created a mortgage on the property. In other words, will the statutory first
charge have priority over an earlier mortgage. It was urged by Mr. Tarkunde,
learned counsel for the appellant-bank that at the time when the statutory
first charge came into existence, there was already a mortgage in respect of
the same property. Therefore, the only property which was possessed by the
dealer and/or person liable to pay tax or other dues under the Rajasthan Sales
Tax Act, was equity of redemption in respect of that property. The first charge
would operate, therefore, only on the equity of redemption. The argument though
ingenious, will have to be rejected. Where a mortgage is created in respect of
any property, undoubtedly, an interest in the property is carved out in favour
of the mortgagee. The mortgagor is entitled to redeem his property on payment
of the mortgage dues. This does not, however, mean that the property ceases to
be the property of the mortgagor. The title to the property remains with the
mortgagor. Therefore, when a statutory first charge is created on the property
of the dealer, the property subjected to the first charge is the entire
property of the dealer. The interest of the mortgagee is not excluded from the
first charge. The first charge, therefore, which is created under Section
11-AAAA of the Rajasthan Sales Tax Act will operate on the property as a whole
and not only on the equity of redemption as urged by Mr. Tarkunde.
In the
present case, the section creates a first charge on the property, thus clearly
giving priority to the statutory charge over all other charges on the property
including a mortgage. The submission, therefore, that the statutory first
charge created by Section 11-AAAA of the Rajasthan Sales Tax Act can operate
only over the equity of redemption, cannot be accepted. The charge operates on
the entire property of the dealer including the interest of the mortgagee
therein.
Looked at
a little differently, the statute has created a first charge on the property of
the dealer. What is meant by a "first charge"? Does it have
precedence over an earlier mortgage? Now, as set out in Dattatreya Shanker Mote
case (1974) 2 SCC 799 a charge is a wider term than a mortgage. It would cover
within its ambit a mortgage also. Therefore, when a first charge is created by
operation of law over any property, that charge will have precedence over an
existing mortgage."
(emphasis
supplied)
23.
In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) 5 SCC
694, a two-Judge Bench reiterated the principles enunciated in Builders Supply
Corporation v. Union of India (supra) and proceeded to observe that Section
158(1) of the Karnataka Land Revenue Act not only gives a statutory recognition
to the doctrine of State's priority for recovery of debts, but also extends its
applicability over private debts forming the subject matter of mortgage,
judgment, decree, execution or attachment of the like.
24.
In State of M.P. v. State Bank of Indore (2002) 10 SCC 441, this
Court considered whether statutory first charge created under Section 33-C of
the M.P. General Sales Tax Act, 1958 would prevail over the bank's charge.
The facts
of that case were that for securing repayment of the loan obtained from the
State Bank of Indore, the borrower executed a promissory note and pledged
certain machinery. The bank sued the borrower for recovery of its dues. During
the pendency of the case instituted by the bank, Section 33-C was inserted in
the State Act.
Thereafter,
the State claimed priority in the matter of recovery of dues of sales tax
vis-`-vis the dues of the bank. The trial Court and the High Court rejected the
plea of the State. The High Court observed that the bank's charge on the
machinery was prior to the insertion of Section 33-C in the State Act and the
subsequent loans taken in 1979 do not alter the position in favour of the
State. The High Court then proceeded to hold that the charge created in favour
of the Bank remains valid and operative till repayment of the loan. This Court
reversed the judgments of the trial Court and the High Court and held:
"Section
33-C creates a statutory first charge that prevails over any charge that may be
in existence. Therefore, the charge thereby created in favour of the State in
respect of the sales tax dues of the second respondent prevail over the charge
created in favour of the Bank in respect of the loan taken by the second
respondent. There is no question of retrospectivity here, as, on the date when
it was introduced, Section 33-C operated in respect of all charges that were
then in force and gave sales tax dues precedence over them."
25.
Recently, in Central Bank of India v. State of Kerala 2009(4) SCC
94, the issue was considered in a slightly different perspective. The
appellant-bank had challenged the vires of Section 26-B of the Kerala General
Sales Tax Act, 1963, whereby first charge was created on the property of the
dealer or the person liable to pay tax by contending that the same was beyond
the legislative competence of the State and was also inconsistent with the
provisions contained in the Recovery of Debts Due to Banks and Financial
Institutions Act, 1963 and the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002. In the connected
appeals, vires of Section 38C of the Bombay Sales Tax Act, 1959 was challenged
on similar grounds. This Court considered various facets of the challenge and
held that the provisions contained in the Sales Tax Act were not beyond the
legislative competence of the State. The Court further held that there is no
inconsistency between the provisions of the State and Central Acts and the non
obstante clauses contained in the Central legislations will not override the
provisions of the State legislations by which first charge was created in
favour of the State in the matter of recovery of the dues of sales tax.
26.
We shall now notice some decisions in which statutes giving parity
or priority to the workers claim have been interpreted. In UCO Bank v. Official
Liquidator, High Court Bombay and another (1994) 5 SCC 1, this Court considered
the scope of proviso to Section 529(1) of the Companies Act as inserted by the
Companies (Amendment) Act, 1985. The Court noted that the object of the
amendment was to protect the interest of the workers and to place them at par
with secured creditors and held:
"The
proviso to sub-section (1) of Section 529 inserted by the Amending Act clearly
provides that "the security of every secured creditor shall be deemed to
be subject to a pari passu charge in favour of the workmen". The effect of
the proviso is to create, by statute, a charge pari passu in favour of the
workmen on every security available to the secured creditors of the employer
company for recovery of their debts at the time when the amendment came into
force. This expression is wide enough to apply to the security of every secured
creditor which remained unrealised on the date of the amendment. The clear
object of the amendment is that the legitimate dues of workers must rank pari
passu with those of secured creditors and above even the dues of the
Government. This literal construction of the proviso is in consonance with, and
promotes, the avowed object of the amendment made. On the contrary, the
construction of the proviso suggested by the learned counsel for the appellant,
apart from being in conflict with the plain language of the proviso also
defeats the object of the legislation.
A debt
due to a secured creditor, when recovered by realisation of the security after
commencement of the winding up proceedings, results in depletion of the assets
in the hands of the Official Liquidator. This provision is intended to protect
the interests of the workmen in proceedings for winding up. In view of the
nature of workmen's dues being similar to those of secured creditors, the
purpose of this provision is to place the workmen on a par with the secured
creditors and create a statutory charge in their favour on all available
securities forming part of the assets of the company in liquidation so that the
workmen also share the securities pari passu with the secured creditors. The
workmen contribute to the growth of the capital and must get their legitimate
share in the assets of the company when the situation arises for its closure
and distribution of its assets first among the secured creditors due to winding
up of the company. The aforesaid amendment made in the Act is a statutory
recognition of this principle equating the legitimate dues of the workmen with
the debts of the secured creditors of the company. To achieve this purpose, it
is necessary that the amended provision must apply to all available securities
which form part of the assets of the company in liquidation on the date of the
amendment. The conclusion reached by the Division Bench of the High Court is
supported by this reason."
(emphasis
supplied)
27.
In A.P. State Financial Corporation v. Official Liquidator
(supra), this Court considered the inter-play of Section 29(1) of the State Financial
Corporations Act, 1951 and Section 529A of the Companies
Act, 1956, which is pari materia to Section 11(2) of
the Act, and held:
"The
Act of 1951 is a special Act for grant of financial assistance to industrial
concerns with a view to boost up industrialisation and also recovery of such
financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such
companies. The proviso to sub-section (1) of Section 529 and Section 529-A
being a subsequent enactment, the non obstante clause in Section 529- A
prevails over Section 29 of the Act of 1951 in view of the settled position of
law. We are, therefore, of the opinion that the above proviso to sub-section
(1) of Section 529 and Section 529- A will control Section 29 of the Act of
1951. In other words the statutory right to sell the property under Section 29
of the Act of 1951 has to be exercised with the rights of pari passu charge to
the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529, the
liquidator shall be entitled to represent the workmen and force (sic enforce)
the above pari passu charge. Therefore, the Company Court was fully justified
in imposing the above conditions to enable the Official Liquidator to discharge
his function properly under the supervision of the Company Court as the new
Section 529-A of the Companies Act confers
upon a Company Court the duty to ensure that the workmen's dues are paid in
priority to all other debts in accordance with the provisions of the above
section. The legislature has amended the Companies Act in 1985
with a social purpose viz. to protect dues of the workmen. If conditions are
not imposed to protect the right of the workmen there is every possibility that
the secured creditor may frustrate the above pari passu right of the
workmen."
(emphasis
supplied)
28.
In Textile Labour Association and another v. Official Liquidator
and another (2004) 9 SCC 741, this Court again interpreted the scope of Section
529-A of the Companies
Act, 1956 and held:
"The
effect of Sections 529 and 529-A is that the workmen of the company become
secured creditors by operation of law to the extent of the workmen's dues
provided there exists secured creditor by contract. If there is no secured
creditor then the workmen of the company become unsecured preferential
creditors under Section 529-A to the extent of the workmen's dues. The purpose
of Section 529-A is to ensure that the workmen should not be deprived of their
legitimate claims in the event of the liquidation of the company and the assets
of the company would remain charged for the payment of the workers' dues and
such charge will be pari passu with the charge of the secured creditors. There
is no other statutory provision overriding the claim of the secured creditors
except Section 529-A. This section overrides preferential claims under Section
530 also. Under Section 529-A the dues of the workers and debts due to the
secured creditors are to be treated pari passu and have to be treated as prior
to all other dues."
29.
The primacy of first charge created under Section 11(2) of the Act
was considered by a Division Bench of the Kerala High Court in Recovery Officer
and Assistant Provident Fund Commissioner v. Kerala Financial Corporation
(2002) 2 KLT 723, in the backdrop of the argument that the provision contained
in Section 46-B of the State Financial Corporations Act, 1951 which also
contains a non obstante clause, will override the provisions of the Act. In
that case, the Recovery Officer appointed under the Act made an application for
recovery of the dues of provident fund payable by the employer-company. He also
attached 37 cents of land which the company had mortgaged to the State
Financial Corporation. The latter challenged the action of the Recovery Officer
by filing writ petition under Article 226 of the Constitution. A learned Single
Judge of the High Court allowed the writ petition and declared that the
company's land could not have been attached for recovery of dues payable under
the Act because the same stood mortgaged in favour of the State Financial
Corporation. The Division Bench reversed the order of the learned Single Judge
and held:
"...
Sub-section (2) of Section 11 of the EPF and MP Act has two faces. First, it
declares that the amount due from the employer towards contribution under the
EPF and MP Act shall be deemed to be the first charge on the assets of the
establishment. Second, it also declares that notwithstanding anything contained
in any other law for the time being in force, such debt shall be paid in
priority to all other debts. Both these provisions bring out the intention of
Parliament to ensure the social benefit as contained in the legislation. There
are other provisions in the Act rendering the amounts of provident fund immune
from attachment of civil court's decree, which also indicate such intention of
Parliament."
The
Division Bench of the High Court then considered the argument that the non
obstante clause contained in Section 46-B of the State Financial Corporations Act has overriding effect qua Section 11(2) of the Act and
negatived the same by making the following observations:
"The
contention of the first respondent based on the overriding effect of Section
46-B of the SFC Act has no substance in our judgment.
Undoubtedly,
the intention of Parliament in enacting Section 46-B in the year 1956 was to
ensure that a State Financial Corporation could quickly and effectively recover
the amounts due by taking possession of the property of the defaulter instead
of having resort to the cumbersome method of recovery through a court of law.
While this was the law, Parliament amended Section 11 of the EPF and MP Act by
specifically enacting sub-section (2) thereof, declaring that the amount due as
contribution to the employees provident fund has first charge on the assets of
the establishment and that, notwithstanding anything contained in any other law
for the time being in force, it shall be paid in priority against all other
debts. In fact, the second facet of Section 11(2) of the EPF and MP Act goes
one step further than what is provided in Section 46-B of the SFC Act. The
reason for this is obvious. While the State Financial Corporation would have to
be helped to recover the debts due to it from a defaulting debtor, the
provident fund payable to workers is of greater moment, since it is a matter of
terminal social security benefit made available by statute to the working
class. Taking into consideration that the EPF and MP Act is a social benefit
legislation, and the evil consequences of provident fund dues being defeated by
prior claims of secured or unsecured creditors, the legislature took care to
declare that irrespective of when a debt is created, the dues under the EPF and
MP Act would always remain first charge and shall be paid first out of the
assets of the establishment. We are also not impressed by the contention of the
first respondent that upon usage of non obstante clause in Section 46-B of the
SFC Act. Sub-section (2) of Section 11 of the EPF Act is of subsequent date. No
doubt, both Section 46-B of the SFC Act and Section 11(2) of the EPF and MP Act
declare their intent by usage of the non obstante clause.
But,
since Section 11(2) of the EPF and MP Act has been enacted later, we must
ascribe to Parliament the intention to override the earlier legislation also.
It is, therefore, clear that Section 11(2) of the EPF and MP Act overrides all
provisions of other enactments including Section 46-B of the SFC Act."
30.
In the light of the above analysis of the relevant provisions of
the Act and precedents, we shall now examine the tenability or otherwise of the
argument of the learned senior counsel appearing on behalf of the
appellant-bank that by virtue of the deeds of pledge executed by the Sugar
Mills, his client had become owner of the sugar bags and the same could not
have been attached and sold for realization of the amount due under the Act.
31.
A careful reading of the deed of pledge dated 5.3.2001 executed by
the management of Kannad Sahakari Sakhar Karkhana Ltd. (the terms of three
deeds dated 2.1.2003, 6.2.2003 and 4.4.2003 executed by the management of the
other Sugar Mill are substantially similar) shows that even though the sugar
bags which were available with the Sugar Mills at the relevant time were placed
in the custody of the appellant-bank as security for repayment of loan together
with interest, the former continued to be owner thereof. To put it differently,
title of the property remained with the Sugar Mills and only limited interest
therein was passed on to the appellant-bank as security for repayment of the
loan etc. If the management of the Sugar Mills were to repay the dues of the
appellant- bank within the time specified in the deeds of pledge, the latter
was duty bound to lift its notional control over the sugar bags lying in the
godowns of the Sugar Mills. In case of default, the appellant-bank could recover
its dues by selling the sugar bags. If the price of the sugar bags was less
than the amount due, the appellant-bank could resort to other appropriate
adjudicatory mechanism for recovery of the balance amount. If the sugar bags
had become property of the appellant-bank simply because the same were pledged
by the management of the Sugar Mills for securing repayment of the loan etc.,
there was no occasion for the latter to take the responsibility of hiring
godowns on behalf of the appellant-bank, pay rent thereof and get the goods
insured. Equally, there was no reason for the management of the Sugar Mills to
take the responsibility of changing or repairing the godowns and bear its cost
or confer immunity upon the bank in the matter of weight, quality, conditions
or safety of the goods and take upon itself the responsibility for any
shortage, damage or shrinkage and insure the goods against any damage or loss
or riots or civil commotion. In our considered view, the very fact that except
giving the symbolic custody of the sugar bags to the appellant-bank by allowing
it to put lock and key on the godowns, all steps for preserving the goods and
getting the same insured were taken by the management of the Sugar Mills which
also agreed to take the responsibility of any shortage, damage or shrinkage
unmistakably shows that the Sugar Mills continued to be owner of the sugar
bags.
32.
As per Black's Law Dictionary (Eighth edition), "pledge"
is a formal promise or undertaking; the act of providing something as security
for a debt or obligation; a bailment or other deposit of personal property to a
creditor as security for debt or obligation. In the "Law of Personal
Property" by Ray Andrews Brown (Second edition 1936), the term
"pledge" has been described in the following words:
"A
pledge is a bailment of personal property to secure an obligation of the
bailor. If the purpose of the transaction is to transfer property for security
only, then the Courts will hold the transaction a pledge, even though in form
it may be a sale or other out-and-out transfer."
In
Mulla's Treaties on the Transfer of Property, the following description has
been given to the term "pledge":
"A
pledge is a bailment of movable property by way of security. Possession is
given and the transaction involves a transfer of special property in the
subject of the security. A Pawnee has no right of foreclosure since he never
had absolute ownership at law and his equitable title cannot exceed what is
specifically granted by law. In a pledge the pledge is in possession of and has
a special property in the goods which he is entitled to detain to secure
repayment."
(underlining
is ours)
33.
Under the common law a pawn or a pledge is a bailment of personal
property as a security for some debt or engagement. A pawner is one who being
liable to an engagement gives to the person to whom he is liable a thing to be
held as security for payment of his debt or the fulfilment of his liability.
The two ingredients of a pawn or a pledge are: (1) that it is essential to the
contract of pawn that the property pledged should be actually or constructively
delivered to the pawnee and (2) a pawnee has only a special property in the
pledge but the general property therein remains in the pawner and wholly
reverts to him on discharge of the debt. A pawn therefore is a security, where,
by contract a deposit of goods is made as security for a debt. The right to
property vests in the pledgee only so far as is necessary to secure the debt.
In this sense a pawn or pledge is an intermediate between a simple lien and a
mortgage which wholly passes the property in the thing conveyed.
34.
In Lallan Prasad v. Rahmat Ali (1967) 2 SCR 233, this Court
referred to the above noted common law principles and observed:
"........A
contract to pawn a chattel even though money is advanced on the faith of it is
not sufficient in itself to pass special property in the chattel to the pawnee.
Delivery of the chattel pawned is a necessary element in the making of a pawn.
But delivery and advance need not be simultaneous and a pledge may be perfected
by delivery after the advance is made. Satisfaction of the debt or engagement
extinguishes the pawn and the pawnee on such satisfaction is bound to redeliver
the property. The pawner has an absolute right to redeem the property pledged
upon tender of the amount advanced but that right would be lost if the pawnee
has in the meantime lawfully sold the property pledged. A contract of pawn thus
carries with it an implication that the security is available to satisfy the debt
and under this implication the pawnee has the power of sale on default in
payment where time is fixed for payment and where there is no such stipulated
time on demand for payment and on notice of his intention to sell after
default. The pawner however has a right to redeem the property pledged until
the sale. If the pawnee sells, he must appropriate the proceeds of the sale
towards the pawner's debt, for, the sale proceeds are the pawner's monies to be
so applied and the pawnee must pay to the pawner any surplus after satisfying
the debt. The pawnee's right of sale is derived from an implied authority from
the pawner and such a sale is for the benefit of both the parties. He has a
right of action for his debt notwithstanding possession by him of the goods
pledged. But if the pawner tenders payment of the debt the pawnee has to return
the property pledged. If by his default the pawnee is unable to return the
security against payment of the debt, the pawner has a good defence to the
action. This being the position under the common law, it was observed in
Trustees of the Property of Ellis & Co. v. Dixon-Johnson that if a creditor
holding security sues for the debt, he is under an obligation on payment of the
debt to hand over the security, and that if, having improperly made away with
the security he is unable to return it to the debtor he cannot have judgment
for the debt."
(underlining
is ours) The Court further observed that there is no difference between Common
Law of England and the law with regard to the pledge, as codified in Sections
172 to 176 of the Contract Act and held:
"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. So long, however, as the sale does not take place the pawner is
entitled to redeem the goods on payment of the debt. It follows therefore that
where a pawnee files a suit for recovery of debt, though he is entitled to
retain the goods he is bound to return them on payment of the debt. The right
to sue on the debt assumes that he is in a position to redeliver the goods on
payment of the debt and therefore if he has put himself in a position where he
is not able to redeliver the goods he cannot obtain a decree. If it were
otherwise, the result would be that he would recover the debt and also retain
the goods pledged and the pawner in such a case would be placed in a position
where he incurs a greater liability than he bargained for under the contract of
pledge. The pawnee therefore can sue on the debt retaining the pledged goods as
collateral security. If the debt is ordered to be paid he has to return the
goods or if the goods are sold with or without the assistance of the court
appropriate the sale proceeds towards the debt. But if he sues on the debt
denying the pledge, and it is found that he was given possession of the goods
pledged and had retained the same, the pawner has the right to redeem the goods
so pledged by payment of the debt. If the pawnee is not in a position to redeliver
the goods he cannot have both the payment of the debt and also the goods. Where
the value of the pledged property is less than the debt and in a suit for
recovery of debt by the pledgee, the pledgee denies the pledge or is otherwise
not in a position to return the pledged goods he has to give credit for the
value of the goods and would be entitled then to recover only the
balance......"
35.
In Bank of Bihar v. State of Bihar (1972) 3 SCC 196, this Court
considered the question whether the Cane Commissioner, who was an unsecured
creditor of the Sugar Mill named Jagdishpur Zamindari Company Limited and did
not have any right of priority over other creditors and in particular the
secured creditors of the company, could seize and sell the sugar which was already
pledged with the appellant-bank as security for the advances made by it to the
company. The appellant-bank sued the State of Bihar and others including the
Cane Commissioner and the company for return of 1818 bags of 27D quality of
sugar and, in the alternative, for recovery of Rs.1,81,700.93 with interest by
way of damages or illegal removal and detention of sugar or price thereof. The
trial Court decreed the suit. It held that even though the order of seizure of
the stock of sugar was valid, the plaintiff's right as pledgee could not be
extinguished by such seizure. The High Court allowed the appeal filed by the
State of Bihar and others and held that the plaintiff-bank had not been
wrongfully deprived of the sugar. In para 4 of the judgment, this Court noted
that the Cane Commissioner did not have any right of priority over the other
creditors of the company and, in particular, the secured creditors and reversed
the judgment of the High Court by recording the following observations.
"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. After 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 pawnor. 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 Government 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 the goods pledged with it on the pawnor making a default in
payment of debt.
The
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."
36.
The ratio of the above noted two judgments is that in a contract
of pawn the property pledged should be actually or constructively delivered to
the pawnee and pawnee has only a special property in the pledge but the general
property remains with the pawner and wholly reverts to him on discharge of
debt. The right to property vests in the pledgee only so far as necessary to
secure his debt.
We,
therefore, hold that the deeds of pledge executed by the management of the
Sugar Mills as security for repayment of loan etc. did not have the effect of
transferring of the ownership of the sugar bags to the appellant-bank and the
Recovery Officer did not commit any illegality by attaching the same and the
High Court was fully justified in directing payment of a portion of the sale
price to the Assistant Commissioner for being appropriated towards the provident
fund dues of the workers.
37.
Before leaving this issue, we may refer to the judgments on which
reliance has been placed by the learned senior counsel appearing for the
appellant-bank. The question which fell for consideration in Karnataka
Pawnbrokers' Association v. State of Karnataka (supra), was whether pawnbroker
is a dealer and carries on business within the meaning of Tamil Nadu General
Sales Tax Act, 1959 read with the Tamil Nadu Pawnbrokers Act, 1943 and Rules as
also the Karnataka Sales Tax Act, 1957 read with Karnataka Pawnbrokers Act,
1961 and Rules, when it caused sale of unredeemed goods occasioned by the
default of the pawnor. The Court referred to the decisions of the Division
Benches of Karnataka and Madras High Courts and held:
"It
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."
(underlining
is ours)
38.
In Central Bank of India v. Siriguppa Sugars & Chemicals Ltd.
(supra), an interim order passed by the Division Bench of Karnataka High Court,
directing disbursement of certain amount realized from sale of stocks of sugar
owned by respondent no.1 - company, which was held under pledge by the
appellant-bank, came up for consideration before this Court. The Labour
Commissioner had passed an order under Section 33-C of the Industrial Disputes
Act in respect of the dues of the workmen. The same was challenged by
respondent no.1, by filing a writ petition. The Cane Commissioner also passed
orders for recovery of the amount due from respondent no.1 - company for being
paid to the sugarcane growers for the cane supplied by them. During the
pendency of the writ petition, the concerned authority took possession of the
stock of sugar which was pledged with the appellant-bank.
The
appellant-bank got itself impleaded as party to the writ petition. As the stock
of sugar was likely to lose its value by being stored indefinitely, the High Court
directed sale thereof. The writ petition was finally dismissed by the learned
Single Judge. During the pendency of the appeal, the Division Bench made an
interim order directing disbursement of a portion of the sale proceeds to the
Labour Commissioner and Cane Commissioner for being paid to the employees of
the company and sugarcane cultivators. The bank challenged the interim order by
contending that as the sugar was pledged with it, the High Court could not have
ordered disbursement of a portion of the price. After making reference to
various judgments including Bank of Bihar v. State of Bihar (supra) and
Karnataka Pawnbrokers' Association v. State of Karnataka (supra), this Court
held:
"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."
(underlining
is ours)
39.
The above referred judgments do not have any bearing on these
appeals because in both the cases, the Court dealt with the right of unsecured
creditors vis-`-vis secured creditors i.e., the bank in whose favour the goods
had been pledged/mortgaged. Moreover, in neither of the cases, a provision
analogous to Section 11 of the Act was considered by the Court.
40.
The next point which requires consideration is whether the sugar
bags pledged with the appellant-bank constitute assets of the establishment within
the meaning of Section 11(2) of the Act.
41.
As per Black's Law Dictionary (Eighth edition), the word `asset'
means, an item that is owned and has value;
the
entries on a balance sheet showing the items of property owned, including cash,
inventory, equipment, real estate, accounts receivable and goodwill; all the
property of a person available for paying debts or for distribution.
In Law
Lexicon by P. Ramanatha Aiyar (Second edition), the word `assets' has been
described as the property in the hands of an heir, an executor, administrator
or trustee which is legally or equitably chargeable with the obligations with
such heir, executor, administrator or trustee is, as such, required to
discharge. Everything which can be made available for the payment of debts,
whether belonging to the estate of a deceased person or not; property in
general all that one owns, considered as applicable to the payment of his
debts; as, his assets are much greater than his liabilities. In Velchand
Chhaganlal v. Mussan 14 Bom.L.R. 633, it was held that the word `assets' means,
a man's property of whatever kind which may be used to satisfy debts or demands
existing against him.
42.
As per Salmond's Jurisprudence, the word "property" means
- in its widest sense, property includes a person's legal rights, of whatever
description. A man's property is all that is his in law. This usage however, is
obsolete at the present day, though it is common enough in the older books. In
a second and narrower sense, property includes not all a person's rights, but
only his proprietary as opposed to his personal rights. The former constitutes
his estate or property, while the latter constitute his status or personal
condition. In this sense a man's land, chattel, shares and the debts due to him
are his property; but not his life or liberty or reputation.... In a third
application, which is that adopted (here) the terms includes not even all
proprietary rights but only those which are both proprietary and in rem. The
law of property is the right of proprietary rights in rem, the law of
proprietary rights in personam being distinguished from it as the law of
obligations. According to this usage a freehold or leasehold estate in land, or
a patent or copyright, is property; but a debt or the benefit or a contract is
not. Finally, in the narrowest use of the term, it includes nothing more than
corporeal property - that is to say, the right of ownership in a material
object, or that object itself.
43.
In the light of the above dictionary and legal meanings of the
word `assets' and jurisprudential concept of the word `property', it has to be
seen whether the sugar bags pledged with the appellant-bank constituted assets
of the establishment for the purpose of Section 11(2) of the Act. We have
already held that even though symbolic custody of the sugar bags was given to
the appellant-bank as security for repayment of loan etc., the Sugar Mills
continued to be owner thereof. In other words, the sugar bags pledged with the
appellant-bank continued to be movable property i.e. assets of the
establishment, which could be attached and sold by the Recovery Officer in
terms of Section 8B or by adopting alternative modes of recovery enumerated in
Section 8F.
44.
At the cost of repetition, it is apposite to mention that Section
11 is declaratory in nature. Sub- section (2) thereof declares that any amount
due from an employer shall be deemed to be first charge on the assets of the
establishment and shall be paid in priority to all other debts. For recovery of
the amount due from an employer which is treated as arrear of land revenue, the
Recovery Officer or any other authorized officer has to take recourse to the
provisions contained in Section 8 read with Sections 8B and 8F. The recovery
can be effected by attachment or sale of the movable or immovable property of
the establishment or, as the case may be, the employer, or by arrest of the
employer and his detention in prison or by appointing a receiver for the
management of the movable or immovable properties of the establishment or, as
the case may be, the employer or by taking action in the manner laid down in
the Third Schedule to the Income-tax Act, 1961.
45.
The judgment in Transcore v. Union of India (supra) on which
reliance has been placed by Shri Desai, does not have any bearing on any of the
facets of the question raised in these appeals. In paragraph 62 of that
judgment, the Court merely referred to Snell's Principles of Equity.
In
paragraph 73, the Court explained the distinction between symbolic and physical
possession and observed that the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 basically deals with the
securities by which the creditor obtains ownership of or interest in the
property concerned i.e., mortgages and the securities under which the secured
creditor, namely, the Bank/Financial Institution obtains interest in the
property concerned.
46.
We shall now deal with the last argument of the learned senior
counsel for the appellant-bank that the interest payable in terms of Section 7Q
and damages imposed under Section 14B of the Act cannot be treated as first
charge on the assets of the establishment payable in priority to all other
debts within the meaning of Section 11(2).
47.
Section 11 gives statutory priority to the amount due from the
employer vis-`-vis all other debts. Clause (a) of sub-section (1) of Section 11
is applicable to cases where an employer is adjudicated insolvent or, being a
company, an order of its winding up is made. In that situation, the amount due
from the employer in relation to an establishment to which any Scheme or the
Insurance Scheme applies in respect of any contribution payable to the Fund or,
as the case may be, the Insurance Fund, damages recoverable under Section 14B,
accumulations required to be transferred under Section 15(2) or any other
charges payable by him under any other provision of this Act or of any
provision of the Scheme or the Insurance Scheme. Clause (b) is applicable to
cases where the amount is due from the employer in relation to exempted
establishment in respect of any contribution to the provident fund or any
insurance fund in so far it relates to exempted employees under the rules of
provident fund or any insurance fund, any contribution payable by him towards
the Pension Fund under Section 17(6), damages recoverable under Section 14B or
any charges payable by him to the appropriate Government under the Act or under
any of the conditions specified in Section 17. This sub-section then lays down
that such amount shall be paid in priority to all other debts in the
distribution of the property of the insolvent or the assets of the company
being wound up.
Sub-section
(2) lays down that any amount due from the employer whether in respect of the
employees' contribution deducted from the wages of the employee or the
employer's contribution shall be deemed to be the first charge on the assets of
the establishment, and shall be paid in priority to all other debts. The
expression "any amount due from an employer" appearing in sub-section
(2) of Section 11 has to be interpreted keeping in view the object of the Act
and other provisions contained therein including sub-section (1) of Section 11
and Sections 7A, 7Q, 14B and 15(2) which provide for determination of the dues
payable by the employer, liability of the employer to pay interest in case the
payment of the amount due is delayed and also pay damages, if there is default
in making contribution to the Fund. If any amount payable by the employer
becomes due and the same is not paid within the stipulated time, then the
employer is required to pay interest in terms of the mandate of Section 7Q.
Likewise, default on the employer's part to pay any contribution to the Fund
can visit him with the consequence of levy of damages. As mentioned earlier,
sub-section (2) was inserted in Section 11 by Amendment Act No.40 of 1973 with
a view to ensure that payment of provident fund dues of the workers are not
defeated by the prior claims of the secured and/or of the unsecured creditors.
While enacting sub-section (2), the legislature was conscious of the fact that
in terms of existing Section 11 priority has been given to the amount due from
an employer in relation to an establishment to which any scheme or fund is
applicable including damages recoverable under Section 14B and accumulations
required to be transferred under Section 15(2). The legislature was also aware
that in case of delay the employer is statutorily responsible to pay interest
in terms of Section 17.
Therefore,
there is no plausible reason to give a restricted meaning to the expression
`any amount due from the employer' and confine it to the amount determined
under Section 7A or the contribution payable under Section 8. If interest
payable by the employer under Section 7Q and damages leviable under Section 14
are excluded from the ambit of expression "any amount due from an
employer", every employer will conveniently refrain from paying
contribution to the Fund and other dues and resist the efforts of the concerned
authorities to recover the dues as arrears of land revenue by contending that
the movable or immovable property of the establishment is subject to other
debts. Any such interpretation would frustrate the object of introducing the
deeming provision and non obstante clause in Section 11(2). Therefore, it is
not possible to agree with the learned senior counsel for the appellant- bank
that the amount of interest payable under Section 7Q and damages leviable under
Section 14B do not form part of the amount due from an employer for the purpose
of Section 11(2) of the Act.
48. In
the result, the appeals are dismissed.
48.
Although, while issuing notice in the special leave petitions and
passing order of status quo, the Court had made it clear that in the event of
dismissal of the special leave petitions, the amount shall be paid by the
petitioner (appellant herein) with interest at the rate which may be fixed by
the Court, we do not consider it just and proper to saddle the appellant-bank
with the liability of interest because price of the sugar sold pursuant to the
High Court's order remained deposited with its Registrar General and the
appellant-bank did not have the benefit of utilizing the same.
.....................................J. [B.N. AGRAWAL]
.....................................J. [G.S. SINGHVI]
.....................................J. [AFTAB ALAM]
New Delhi,
October 8, 2009.
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