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CASE NO.: Appeal (civil)  3499-3500 of 2007

PETITIONER: CENTRAL BANK OF INDIA

RESPONDENT: SIRIGUPPA SUGARS & CHEMICALS LTD. & ORS

DATE OF JUDGMENT: 07/08/2007

BENCH: TARUN CHATTERJEE & P.K. BALASUBRAMANYAN

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NOS.3499-3500 OF 2007 (Arising out of SLP(C) No.181-182 of 2004)

P.K. BALASUBRAMANYAN, J.

                Leave granted.

1.              These appeals challenge the interim order passed by  the Division Bench of the High Court in a pending writ appeal,  directing disbursement of certain amounts realised on sale of  stocks of sugar, owned by the first respondent \026 company held  under pledge by the appellant--bank.  The Labour  Commissioner had passed an order under Section 33(c) of the  Industrial Disputes Act against the first respondent company  in respect of the dues to the workmen.  The same was  challenged by the first respondent in the writ petition as also  by others.  Similarly the Cane Commissioner had passed  orders for recovery of amounts due from the first respondent- company for being paid to the sugarcane growers for the cane  supplied by them to the first respondent-company.  During the  pendency of the writ petition, the recovery authority had taken  possession of stock of sugar lying pledged to the appellant\027 bank and under its control, forcibly and without reference to  the appellant--bank.  The appellant--bank had got itself  impleaded in the writ petition.  Considering that the sugar  stock was liable to lose its value by being stored indefinitely,  the court had directed sale of the sugar.  The sale fetched a  price of Rs.1,53.50,400/-.  Out of the same, a sum of  Rs.10,60,800/- was paid towards excise duty and the balance  was held under orders of court.

2.              The writ petition filed by the first respondent  challenging the recovery proceedings, both at the instance of  the Labour Commissioner and the Cane Commissioner was  dismissed by the learned Single Judge.  The decision of the  learned Single Judge was challenged in appeal.  In the appeal  filed by the company, the impugned interim order was made  directing that a sum of Rs.43,00,000/- be made available to  the Labour Commissioner for disbursement to the employees  of the company, a sum of Rs.60,00,000/- be made available to  the Cane Commissioner for disbursal to the sugarcane  cultivators who had supplied sugarcane and a sum of  Rs.20,00,000/- be paid to the appellant--bank, subject to the  bank obtaining sanction from the Board for Industrial and  Financial Reconstruction (for short "BIFR") and that the

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balance shall be kept in a fixed deposit subject to final orders.   The appellant bank has challenged this order on the ground  that its right as a pawnee, well recognised by law, had been  totally ignored by the Division Bench of the High Court.   Consequently, the order is clearly illegal and that such an  interim order ought not to have been passed when the final  adjudication had to be made in the appeals that were pending  before the High Court.

3.              We may notice here that there are no proceedings  for winding up of the first respondent-company under the  Companies Act.  The first respondent-company has only  approached BIFR by way of reference under Section 15(1) of  the Sick Industrial Companies (Special Provisions) Act.

4.              Learned counsel for the appellant--bank submitted  that the High Court was clearly in error in ignoring the rights  of the appellant as a pawnee and in ignoring the binding  decisions of this Court on the rights of the pawnee to the  proceeds of the sale of the goods pledged to it to secure a debt  due from the borrower.  According to him, the bank as pawnee  has the first charge on the stock of sugar and the charge  crystalised when the stock of sugar pledged with it was sold.   When it has thus crystalised, the bank had a priority over the  debts due to other unsecured creditors.  Neither the Cane  Commissioner, nor the Labour Commissioner, in this case or  the workmen, on whose behalf he was acting, were secured  creditors.  Consequently, the right of the appellant as the  pawnee must prevail.  Counsel submitted that the workmen  become secured creditors only when there is a winding up and  it is Section 529 of the Companies Act that made them  secured creditors, entitled to disbursement pari pasu with  other secured creditors.   In the absence of any winding up  proceeding the workmen had no preferential rights and their  status, at best, was that of unsecured creditors.  Counsel  further submitted that by passing such an interim order the  Division Bench had seriously prejudiced the rights of parties  which remain to be determined in the writ appeal itself and  such an interim order ought not to have been passed.

5.              On behalf of the respondents, it was contended that  the amounts due to the sugarcane growers and to the  workmen had to be provided for and going by some of the  decisions of this Court, the workmen’s dues could not be  ignored and under the circumstances, there is no reason to  interfere with the interim order passed by the Division Bench  of the High Court.  Additional Solicitor General also submitted  that the question whether sales tax dues or the dues under a  certificate issued by the Debt Recovery Tribunal had priority,  had been referred to a larger Bench for a decision.  It was  submitted that the decision in State of M.P. vs. Jaura Sugar  Mills Ltd. And others (1997 (9) SCC 207) will apply here.  On  behalf of the State it was submitted that the decision in State  of M.P.’s case (supra) held the field and the order of the  Division Bench was supportable in the light of that decision.

6.              The right of the lender, or pledgee, is to retain the  chattle until a proper tender of the amount due is made.(See  The Law of Mortgages by Edward F. Cousins)  Under Section  173 of the Contract Act, a pawnee has the right to retain the  goods pledged for payment of the debt including interest on  the debt and all necessary expenses incurred by the pawnee in  respect of the possession or for the preservation of the goods  pledged.  The rights of the pawnee were summed up by this  Court in Lallan Prasad vs. Rahmat Ali and another  (1967 (2)

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SCR 233 at 239)  thus: "There is no difference between the common  law of England and the law with regard to  pledge as codified in sections 172 to 176 of the  Contract Act.  Under Section 172 a pledge is a  bailment of the goods as security for payment  of a debt or performance of a promise.  Section  173 entitles a pawnee to retain the goods  pledged as security for payment of a debt and  under Section 175 he is entitled to receive  from the pawner any extraordinary expenses  he incurs for the preservation of the goods  pledged with him. Section 176 deals with the  rights of a pawnee and provides that in case of  default by the pawner the pawnee has (1) the  right to sue upon the debt and to retain the  goods as collateral security and (2) to sell the  goods after reasonable notice of the intended  sale to the pawner.  Once the pawnee by virtue  of his right under Section 176 sells the goods  the right of the pawner to redeem them is of  course extinguished.  But as aforesaid the  pawnee is bound to apply the sale proceeds  towards satisfaction of the debt and pay the  surplus, if any, to the pawner."

7.              In the Bank of Bihar vs. State of Bihar and others  (1971  Suppl. SCR 299)  the law is set down thus: "According to the Statement in Halsbury’s  Laws of England "pawn" has been described as  a security where by contract a deposit of goods  is made a security for a debt and the right to  the property vests in the pledgee so far as is  necessary to secure the debt; in this sense it is  intermediate between a simple lien and a  mortgage which wholly passed the property in  the things conveyed.  "The pawnee has a  special property or special interest in the thing  pledged, while the general property therein  continues in the owner.  That special property  or interest exists so that the pawnee can  compel payment of the debt or can sell the  goods when the right to do so arises.  This  special property or interest is to be  distinguished from the mere right of detention  which the holder of a lien possesses, in that it  is transferable in the sense that a pawnee may  assign or pledge his special property or  interest in the goods."  "Where judgment has  been obtained against the pawnor of goods and  execution has issued thereon, the sheriff  cannot seize the goods pawned unless he  satisfied the claim of the panwee".  (based  mainly on Rogers vs. Kennay (1846 (9) Q.B.  592).  "On the bankruptcy of the pawnor the  pawnee is a secured creditor in the bankruptcy  with respect to things pledged before the date  of the receiving order and without notice of a  prior available act of bankruptcy".  (Halsbury’s  Laws of England 3rd Edn. Vol.29 p.222)   It has  not been shown how the law in India is in any  way different from the English law relating to  the rights of the pawnee vis-‘-vis other

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unsecured creditors of the pawnor.

In our judgment the High Court is in error in  considering that the rights of the pawnee who  had parted with money in favour of the pawnor  on the security of the goods can be defeated by  the goods being lawfully seized by the  Government and the money being made  available to other creditors of the pawnor  without the claim of the pawnee being fully  satisfied.  The pawnee has special property  and a lien which is not of ordinary nature on  the goods and so long as his claim is not  satisfied no other creditor of the pawnor has  any right to take away the goods or its price.   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 pawner.  But by a mere  act of lawful seizure the Government could not  deprive the plaintiff of the amount which was  secured by the pledge of the goods to it.  As the  act of the Govenrment resulted in deprivation  of the amount to which the plaintiff was  entitled it was bound to reimburse the plaintiff  for such amount which the plaintiff in ordinary  course would have realized by sale of goods  pledged with it on the pawnor making a default  in payment of debt.

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." (emphasis supplied)

8.              It has to be noticed that the Cane Commissioner  was held to be an unsecured creditor, he could not have any  higher right than the pawnor and was entitled only to the  surplus money after satisfaction of the pawnee’s dues.

9.              In Karnataka Pawnbroker’s Association and  others vs.  State of Karnataka and others (1998 (7) SCC  707) this Court summed up the position as under: "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

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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."

10.             The Act there referred was the Karnataka Sales Tax  Act and the question that fell for decision was whether the  pawnee, the pawnbroker, on sale could be considered to be a  dealer, liable to pay sales tax under the Sales Tax Act.

11.             In Dena Bank vs.  Bhikhabhai Prabhudas Parekh  & Co. and others (2000 (5) SCC 694) the position was  reiterated in the following words: "However, the Crown’s preferential right to  recovery of debt over other creditors is  confined to ordinary or unsecured creditors.   The common law of England or the principles  of equity and good conscience (as applicable to  India) do not accord the Crown a preferential  right for recovery of its debts over a mortgagee  or pledgee of goods or a secured creditor.  It is  only in cases where the Crown’s right and that  of the subject meet at one and the same time  that the Crown is in general preferred.  Where  the right of the subject is complete and perfect  before that of the King commences, the rule  does not apply, for there is no point of time at  which the two rights are at conflict, nor can  there be a question which of the two ought to  prevail in a case where one, that of the subject,  has prevailed already.  In Giles vs. Grover  (1832 (131) ER 563 : 9 Bing 128) it has been  held that the Crown has no precedence over a  pledgee of goods.  In Bank of Bihar vs. State  of Bihar (supra) the principle has been  recognised by this Court holding that the  rights of the pawnee who has parted with  money in favour of the pawnor on the security  of the goods cannot be extinguished even by  lawful seizure of goods by making money  available to other creditors of the pawnor  without the claim of the pawnee being first  fully satisfied.  Rashbehary Ghose states in  Law of Mortgages (Tagore Law Lectures, 7th  Edn. P. 386) \026 "It seems a government debt in  India is not entitled to precedence over a prior  secured debt."

12.             It may be noted that even the Crown’s preferential  right or a Crown debt was held to be subservient to the rights  of a pawnee.  

13.             In O. Konavalov vs. Commander, Coast Guard

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Region and others (2006 (4) SCC 620)  this Court held that  the lien of a pawnee traceable to Sections 172, 173 and 176 of  the Contract Act is capable of satisfaction from property in the  hands of the Government obtained even by lawful seizure.   This Court followed the views expressed in the decision in   Bank of Bihar vs. State of Bihar (supra).

14.             In Workers of M/s Rohtas Industries Ltd. Vs. M/s  Rohtas Industries Ltd. (1987 (2) SCC 588) a direction was  made for payment of the workers dues by stating that such  dues will have priority over other banks and financial  institutions.  On going though the facts, it is seen that it was a  case where proceeding for liquidation of the company was  going on and obviously Section 529 of the Companies Act was  attracted.  Moreover, it is not seen that the rights of a pawnee  vis-‘-vis the rights of the workmen is discussed.  Since a  liquidation had intervened there, which is not the case here,  the said decision cannot be of any assistance to support the  order passed by the High Court.  In fact, in Workers of M/s  Rohtas Industries Ltd. Vs. M/s Rohtas Industries Ltd.  (1987 Suppl. SCC 462) rendered while clarifying the earlier  order,  it was stated that the earlier order of the Court was  made under peculiar circumstances obtaining in the case and  was not to be taken as a precedent.  Hence, even apart from  the distinction, no value as a precedent can be attached to  that decision.

15.             In State of M.P. vs. Jaura Sugar Mills Ltd. And  others (supra) dealing with the Madhya Pradesh Sugar Cane  (Regulation and Supply) Act, it was only held  that the Cane  Commissioner having power to compel the cane growers to  supply cane to the factory, has incidental power and is duty  bound to ensure payment of the price of the sugarcane  supplied by the sugarcane growers.  With respect, this  decision does not enable us to adjudge the rights of a pawnee  on the sale of the pawned goods or alter the status of the Cane  Commissioner or the cane grower from only that of an  unsecured creditor as recognised in Bank of Bihar (supra).

16.             The decision in Textile Labour Association and  another vs. Official Liquidator and another (2004 (9) SCC  741) was a case of liquidation and was a case to which Section  529 and 529A of the Companies Act were attracted.  The said  decision is also of no help in the case on hand since a  liquidation has not intervened in the present case.

17.             The decision in Rajasthan State Financial  Corporation and another vs. Official Liquidator and  another (2005 (8) SCC 190) is also of no help since that was  also a case where the question was the effect of Section 529  and 529A of the Companies Act on the power of the Debt  Recovery Tribunal to sell the assets of the entity under  winding up.

18.             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

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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.

19.             We are also of the view that pending the writ  appeals, the High Court ought not to have passed such an  interim order of consequence especially in the light of the legal  principles settled by this Court.   The order of the High Court,  therefore, cannot be sustained and calls for interference. 20.             We, therefore, allow these appeals and set aside the  impugned order of the High Court, directing payment out of  parts of the sale proceeds to the Labour Commissioner and to  the Cane Commissioner.  We hold that the appellant as the  pawnee, is entitled to the amount in satisfaction of its debt to  secure which, the goods had been pawned and to appropriate  the sale proceeds towards the debt due and only if there is  surplus, to make it available for disbursal to the Cane  Commissioner and to the Labour Commissioner.   In the  circumstances, we direct the parties to suffer their respective  costs.