THE HONOURABLE MR v. The Recovery Officer

IN THE HIGH COURT OF JUDICATURE AT MADRASDated: 20.01.2007THE HONOURABLE MR.JUSTICE P.JYOTHIMANIW.P.No.27951 of 2006M/s.Sivananda Steels LimitedNo.18,19,20, Industrial Estate,Ambattur, Chennai 600 058Rep.by its Managing DirectorP.Venkatesan... PetitionerVs.1.The Recovery Officer,Employees State Insurance Corporation,143, Sterling Road,Nungambakkam,Chennai 600 034. 2.The Dhanalakshmi Bank Ltd.,No.34, CSM Plaza, Venkatakrishna Road,Mandaveli,Chennai 600 028. ... RespondentsPRAYER:This writ petition is filed under Article 226 of theConstitution of India to issue a writ of mandamus, calling for therecords in respect of the impugned notice issued by the 1st respondenton 22.08.2006 in Ref.TN/RECY/ 45(G)-51-9282 to the 2nd respondent,quash the same directing the 1st respondent not to take the coerciveaction to realize alleged interest without consent of the BIFR. For Petitioner: Mr.C.S.DhanasekaranFor Respondent No.1: Mr.A.ParamasivamR2: NAO R D E RThe writ petition is filed challenging the notice issued by thefirst respondent Employees State Insurance Corporation, dated22.08.2006 thereby directing the second respondent to pay an amountof Rs.9,40,146/- towards interest and the said notice is purported tobe issued under Section 45(g) of the Employees State Insurance Act,1948. This notice is challenged by the petitioner on the ground that https://hcservices.ecourts.gov.in/hcservices/ the petitioner/company was referred to the Board for Industrial andFinancial Reconstruction (BIFR) and a scheme was sanctioned on09.08.2005. As per the scheme, the provision relating to EmployeesState Insurance and Employees Provident Fund, which was agreed uponbetween the parties, was as follows: "H.ESIC/Employees Provident Fund:(i) To grant waiver of penal interest and othercharges as on the cut-off date and during therehabilitation period. (ii) To accept the principal outstanding (ESIC-Rs.12.64 lakh and EPF-Rs.28.53 Lakh) as on cut-off dateover a period of three years from April 1, 2004."2. According to the petitioner, pursuant to the said sanctionedscheme the petitioner has paid the entire amount of Rs.12.64 lakhsand therefore, there was no due in respect of the said payment. Nowthe impugned order is passed claiming another amount of Rs.9,40,146/-being the amount of interest. According to the petitioner, when oncepursuant to the scheme sanctioned, the agreed amount of E.S.I.contribution of Rs.12.64 lakhs was already paid and when the clausealso specifically provides waiver of penal interest and othercharges, it is not open to the first respondent to claim interestnow. According to the petitioner, by the impugned order the firstrespondent has frozen the accounts of the petitioner lying in thesecond respondent, which affects the implementation of the scheme assuch and therefore, the present Writ Petition is filed. 3. On the other hand, the first respondent, who has filed thecounter affidavit would submit that while it is true that the Boardfor Industrial and Financial Reconstruction (BIFR) directed as perthe sanctioned scheme to pay the amount of Rs.12.64 lakhs asoutstanding due to Employees State Insurance Corporation, what is nowsought to be recovered under the impugned order is only an interestdue from the petitioner in respect of the belated payment ofcontribution charged as per section 39(5) of the Employees StateInsurance Act r/w Regulation 31 and 31(a) (General Regulation, 1950).According to the first respondent, what was waived was only penalinterest and other charges, which does not include the normalinterest payable in respect of belated payments. According to thefirst respondent, the right under Section 39(5) of the E.S.I.Act,which relates to payment of simple interest is different from theliability under Section 85(b) of the Act, which relates to a recoveryof damages. What is contemplated in the sanctioned scheme is only inrespect of the penal interest, which are otherwise damages as perSection 85(b) of the Employees State Insurance Act. https://hcservices.ecourts.gov.in/hcservices/

4. I have heard the learned counsel for the petitioner as alsothe learned counsel appearing for the first respondent. 5. It is admitted that there has been a sanctioned scheme inthis present case and as I have elicited above, in respect of thepayment of Employees State Insurance contribution, there are 2clauses relation to 1) the waiver of penal interest and other charges 2) the payment of a lumpsum which amount admittedly has been paid. The contentions of thelearned counsel for the first respondent is that it is only the penalinterest which should be equated to that of damages under Section 85(b) that has been waived and what is claimed under the presentproceedings issued under Section 45(g) of the Employees StateInsurance Act, is only simple interest, as contemplated under Section39(5) of the Act. Section 85(B), which contemplates powers torecover damages states as follows: "85-B. Power of recover damages.- (1) Where an employerfails to pay the amount due in respect of any contributionor any other amount payable under this Act, the Corporationmay recover (from the employer by way of penalty suchdamages not exceeding the amount of arrears as may bespecified in the regulations):Provided that before recovering such damages, theemployer shall be given a reasonable opportunity of beingheard: (Provided further that the Corporation may reduce orwaive the damages recoverable under this section inrelation to an establishment which is a sick industrialcompany in respect of which a scheme for rehabilitation hasbeen sanctioned by the Board for Industrial and FinancialReconstruction established under section 4 of the SickIndustrial Companies (Special Provisions) Act, 1985 (1 of1986), subject to such terms and conditions as may bespecified in regulations.)(2) Any damages recoverable under sub-section (1) maybe recovered as an arrear of land revenue (or under section45-C to section 45-I)."Similarly, Section 39(5), states as follows:"39(5)(a) If any contribution payable under this Act is https://hcservices.ecourts.gov.in/hcservices/ not paid by the principal employer on the date on whichsuch contribution has become due, he shall be liable to paysimple interest at the rate of twelve per cent annum or atsuch higher rate as may be specified in the regulationstill the date of its actual payment:Provided that higher interest specified in theregulations shall not exceed the lending rate of interestcharges by any scheduled bank. (b) Any interest recoverable under clause (a) may berecovered as an arrear of land revenue or under section 45-C to section 45-I."6. In respect of the amounts either under Section 39(5) orunder Section 85(b), the Employees State Insurance Corporation isentitled to recover the same by coercive process under Section 45(c)to 45(i) of the Act. However, it remains a fact that in respect ofrecovery in both sections, it is due to the failure on the part ofthe employer from making contribution of any amount payable under theAct. Of course, in one case it is called interest and in anothercase it is called damages. 7. Under the provisions of the Sick Industrial Companies(Special Provisions Act, 1985), the preparation and sanction ofschemes as contemplated under Section 18, contemplates a clause thaton and from the date of coming into operation of sanctioned scheme itis binding on the Sick Industrial Company and the transferee company.That apart under Section 18(9) which enables the board to clarify anydifficulty, which may be necessary. Section 18(9) states as follows: "18(9) If any difficulty arises in giving effect to theprovisions of the sanctioned scheme the Board may, on therecommendation of the operating agency (or otherwise), byorder do anything, not inconsistent with such provisions,which appears to it to be necessary or expedient for thepurpose of removing difficulty"8. Further, Section 18(12) states "the board may monitorperiodically the implementation of the sanctioned scheme". In thelight of the above provision, the contention raised on behalf of thelearned counsel for the first respondent that the petitioner companyhas already been discharged from the purview of Sick IndustrialCompany Act, and therefore, the board seizes to have any control overthe implementation of the scheme, is to be considered. As per theorder of Board for Industrial and Financial Reconstruction (BIFR)stated to be on 18.04.2006, the operative portion runs as follows: https://hcservices.ecourts.gov.in/hcservices/ "In view of the fact that the sanctioned scheme had beenimplemented substantially with settlement of dues of allsecured creditors and VRS to all the workers who had optedfor the same and net worth having become positive, theboard hereby discharges the company from the purview ofSICA with a proviso that the company shall continue toimplement the scheme in letter and spirit and residualissues as per the SS shall be complied with within the timeschedule fixed therein."9. A reading of the said order shows that even though thecompany is stated to have been discharged from the purview of SickIndustrial Company, there is a proviso stating that the company shallcontinue to implement the scheme in letter and sprit and it is inthis regard by virtue of Section 18(12) of the Act, the board has gota right to monitor in respect of implementation of the sanctionedscheme. Therefore, it cannot be said as if the board seizes to haveany control over the affairs of the petitioner company. 10. Now that it is the first respondent, who is raising theissue that, what is sought to be recovered by coercive proceedingsunder the impugned order is only an interest under Section 39(5)(a)of the Employees State Insurance Act, which was not barred by thesanctioned scheme, and according to the learned counsel for the firstrespondent, what was barred is only the penal interest under Section85(b) of the Employees State Insurance Act, which in fact is calledunder the said provision as damages. It is only for the firstrespondent to seek appropriate clarification from Board forIndustrial and Financial Reconstruction (BIFR) and that cannot be theground for taking coercive action against the petitioner underSection 45(g) of the Act. It is in this regard relevant to point outthat Section 22(1) of the Sick Industrial Companies Act, bars thelegal proceedings as well as execution and distress proceedings, evenin cases where the sanctioned scheme under implementation Section 22(1) of the Sick Industrial Companies which runs as follows: "22(1) Where in respect of an industrial company, aninquiry under Section 16 is pending or any scheme referredto under Section 17 is under preparation or considerationor a sanctioned scheme is under implementation or where anappeal under section 25 relating to an industrial companyis pending, then, notwithstanding anything contained in theCompanies Act, 1956, or any other law or the memorandum andarticles of association of the industrial company or anyother instrument having effect under the said Act or otherlaw, no proceedings for the winding up of the industrialcompany or for execution, distress or the like against anyof the properties of the industrial company or for the https://hcservices.ecourts.gov.in/hcservices/ appointment of a receiver in respect thereof (and no suitfor the recovery of money or for the enforcement of anysecurity against the industrial company or of any guaranteein respect of any loans or advance granted to theindustrial company) shall lie or be proceeded with further,except with the consent of the Board or, as the case maybe, the appellate authority."11. The scope of Section 22(1) came to be decided in GramPanchayat Vs. Shree Vallabh Glass Works Ltd., reported in AIR 1990 SC1017, wherein the Supreme Court has held that Section 22(1) of SickIndustrial Companies Act, automatically suspends the followingproceedings namely:1) winding up of the Industrial company2) proceedings for execution, distress or the like against theproperties against the Sick Industrial Company and 3) proceedings for the appointment of receiverFurther stating that such proceeding may continue against the SickIndustrial Company with the consent of the board or the appellateauthority as may be. While dealing with the recovery of arrears ofsales taxes, the Supreme Court again reiterated the same in TATA DavyLtd., Vs. State of Orissa reported in AIR 1998 SC 2298. 12. The Hon’ble Full Bench of this Court in the judgementrendered in Gowri Spinning Mills (P) Ltd., Rep. by the ManagingDirector, Thokkampatti, Dharmapuri. Vs. Assistant Provident FundCommissioner, Sub-Regional Office, Salem reported in 2006(5) CTC 1,by referring to the said judgements of the Supreme Court has heldthat such coercive proceedings cannot be taken. Therefore, it isclear that either where the scheme is under the formation stage orwhere the scheme has been sanctioned, till the same is completelyimplemented, Section 22(1) of the Sick Industrial Companies Act,suspends all sorts of distress proceedings, which include theproceedings initiated by the first respondent in the present caseunder the impugned notice issued under Section 45(g) of the EmployeesState Insurance Act. 13. In view of the same, the impugned notice by the firstrespondent is set aside, however, giving liberty to the firstrespondent to approach the Board for Industrial and FinancialReconstruction (BIFR) under Section 18(9) of the Sick IndustrialCompanies Act, for clarification of any difficulty regarding theinterest, whether the same is liable to be paid or not under thesanctioned scheme . https://hcservices.ecourts.gov.in/hcservices/ The Writ Petition stands allowed in the above terms. No Costs.Consequently, the connected W.P.M.P.is closed. Sd/Asst.Registrar/true copy/Sub Asst.Registrarnbj1.The Recovery Officer,Employees State Insurance Corporation,143, Sterling Road,Nungambakkam,Chennai 600 034.+3ccs to Mr.C.S.Dhanasekaran, Advocate Sr 3640+1cc to Mr.A.Paramasivam, Advocate Sr 3636BV (CO)km/29.1. W.P.No.27951 of 2006