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The Maharashtra State Co-operative Bank Ltd. v. Babulal Lade & Ors.

Civil Appeal · 2019 INSC 1318Decided 4 Dec 2019
Civil Appeal No. 232 of 2016
Justice Mohan M. Shantanagoudar · Justice Krishna Murari

Background

A sugar factory (the "Karkhana"), a cooperative society, had taken loans from the appellant bank and mortgaged its properties, then defaulted, prompting the bank to take possession and later sell the mortgaged property under the SARFAESI Act. Meanwhile, the Karkhana's employees, who had gone unpaid for years, won an order from the Industrial Court declaring non-payment an unfair labour practice and later obtained a recovery certificate for over Rs 13.89 crore against the Karkhana. The dispute reaching the Supreme Court was whether the employees could recover their dues ahead of the bank (a secured creditor) from the sale proceeds of the mortgaged property, especially after the High Court invoked Section 529A of the Companies Act (giving workers' dues top priority) to allow such recovery from the bank.

Decision Breakdown

The Supreme Court held the High Court erred in applying Section 529A of the Companies Act because Section 167 of the Maharashtra Co-operative Societies Act expressly bars the Companies Act's application to cooperative societies. It further held that dues recoverable merely "as if" arrears of land revenue (under Section 50 of the MRTU & PULP Act and Section 169(2) of the Maharashtra Land Revenue Code) only get priority over unsecured claims, not over a secured creditor's claim, so the employees' dues did not automatically outrank the bank's SARFAESI claim as a matter of statutory priority. However, examining the bank's own sale letter and sale certificate for the property, the Court found the bank had contractually undertaken to bear the employees' dues itself (while the purchaser would bear other statutory liabilities): this contract displaced the default distribution scheme under Section 13(7) of the SARFAESI Act. On that contractual basis, the Court held the bank was liable to pay the employees' dues from the sale proceeds within six months, while other statutory dues (PF, gratuity, bonus) would fall on the purchaser, and disposed of the appeal accordingly.

Lesson Learnt

A secured creditor does not automatically get an absolute "first charge" over sale proceeds under the SARFAESI Act: if it has separately undertaken contractual obligations (such as agreeing in a sale letter to pay certain dues), that contract can override the Act's default distribution scheme and bind the creditor to honour its promise.

Official source (sci.gov.in)View Judgment (PDF)

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