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2009 DIGILAW 629 (KER)

Sundaram Finance Limited v. Tahsildar, Kollam

2009-07-13

C.K.ABDUL REHIM, C.N.RAMACHANDRAN NAIR

body2009
Judgment :- Ramachandran Nair, J. The petitioner before the learned Single Judge is the appellant before us. The W.P.(C) was filed challenging revenue recovery proceedings initiated by the first respondent for recovery of arrears of sales tax against the personal property of the 5th respondent who was director of the third respondent-company, the defaulter for sales tax. The case of the appellant is that they advanced hire purchase loan to the third respondent-company for plant and machinery and the property under attachment was mortgaged to the appellant as collateral security. The case of the State is that the defaulter company is in arrears of sales tax of above Rs.4 crores. Besides this, massive amount is due from defaulter company to the second respondent. After taking hire purchase loan from second respondent by hypothecating the movables, the third respondent misled the appellant-petitioner stating that there was no hypothecation of the movables and based on the promise the appellant-petitioner also gave a hire purchase loan to the defaulter company. In fact both respondents 2 and 3 entered into hire purchase agreements in respect of existing movables namely, plant and machinery of the defaulter company and not for purchase of any plant and machinery which is normally the hire purchase agreement entered between borrower-hirer and financiers. The third respondent in the course of time ran into huge arrears of tax and did not honour any of the commitments to any of the creditors leading to huge liability. The company is now stated to be under liquidation. Since liquidation proceedings are initiated, the State proceeded to attach the property of the 5th respondent who is stated to have executed a bond for payment of arrears of sales tax. However, according to the appellant-petitioner, in the suit filed they have obtained decree on 4.3.1998 against the property of the 5th respondent which was already under attachment by the first respondent for arrears of sales tax. The question raised before the learned Single Judge was whether the State was entitled to priority over the decree obtained by the petitioner-appellant against respondents 3 and 5. The question raised before the learned Single Judge was whether the State was entitled to priority over the decree obtained by the petitioner-appellant against respondents 3 and 5. The learned Single Judge relying on several decisions upheld the claim of the State holding that the State has priority over the other debt, though the debt due from the borrower company to the petitioner- appellant is secured through a mortgage of the property belonging to 5th respondent who was director of the company. It is against this judgment the appeal is filed. We have heard Senior counsel Sri.V.R.Venkatakrishnan appearing for the appellant, Government Pleader appearing for the State, Mr.V.G.Arun, appearing for the 5th respondent and counsel appearing for the KSIDC. 2. We find that subsequent to the judgment by the learned Single Judge, the Supreme Court has decided the issue in Central Bank Of India & Others V. State Of Kerala & Others ((2009) 17 Ktr 189), wherein it is held that Government debt has priority even over debt covered by prior mortgage. Senior counsel appearing for the appellant contended that the decision does not apply to this case because the property proceeded against does not belong to the defaulter-company, but is the private property of the director. Against this contention, Special Government Pleader appearing for the State contended that in the first place, State has got a bond executed by the 5th respondent-director of the company undertaking to discharge the liability towards arrears of tax due from the company. Besides this, he has contended that by virtue of Section 26C, the property of 5th respondent being a director also can be proceeded against. The contention of the Senior counsel appearing for the appellant is that Section 26C is subject to the provisions of the Companies Act which in Section 322 provide that directors will have unlimited liability only if Articles of Association so provide. He has referred to the findings of the learned Single Judge that Articles of Association of the company does not provide unlimited liability for the directors. We do not think Section 322 will stand in the way of the Government proceeding against directors of a private limited company because by virtue of Section 26C, directors are jointly and severally liable for the arrears of tax along with the company. We do not think Section 322 will stand in the way of the Government proceeding against directors of a private limited company because by virtue of Section 26C, directors are jointly and severally liable for the arrears of tax along with the company. In our view, subject to the provisions of the Companies Act referred to in Section 26C is actually not Section 322 which talk about unlimited liability of directors contained in Articles of Association. What is sought to be introduced by Section 26C is nothing but liability which directors do not have under the Companies Act. No provision of the Companies Act is brought to our notice which goes against the scheme of Section 26C which is similar to Section 179 of the Income Tax Act which authorises Central Government to recover arrears of tax due from directors of a private limited company. In later decision of the Supreme Court abovereferred, the Supreme Court has declared the priority of the State to recover tax arrears over even mortgage debt. The position is not different here and the only difference is that property belongs to a director personally and not to the defaulter-company. However, the decision fairly applies here in as much as by virtue of Section 26C, the property of a director is liable as if it is the property of the defaulter company. Consequently first respondent rightly attached the property for recovery of arrears of sales tax and the claim of the appellant and the second respondent will be honoured if there is anything left after adjusting the sales proceeds towards tax arrears. We, therefore, uphold the judgment of the learned Single Judge and dismiss the Writ Appeal. However, since property is under attachment for over 10 years and sale has not taken place, we direct the District Collector to oversee the recovery proceedings and to ensure that property is sold without any delay and sale proceeds recovered, first adjust it towards tax arrears and if there is any balance, the same should be distributed among other creditors of the 5th respondent in terms of their priority.