State Of Haryana vs ICICI Bank Ltd. And Ors.

Ranjit Singh, J

The State of Haryana is in appeal against the order passed by DRT-II, Delhi holding that respondent ICICI Bank is entitled to recover sum of Rs. 94,71,730/- along with interest @ 13.01 % p.a. with cost from 22.8.2008 until realisation from respondents 2 to 5 jointly and severally. The grievance of the State Haryana is not against the amount decreed or for the recovery of which the Bank has been held entitled to. It only claims priority on the amount on the ground that vehicles which are hypothecated with the Bank are under the charge of the State of Haryana. The facts in brief are that respondent No. 2 is a partnership firm of respondent Nos. 3 to 5. Respondent No. 1 Bank advanced certain loan to it to purchase 9 vehicles/equipment/machinery under the loan-cum-hypothecation scheme. The respondents defaulted in making repayment and as on 19.8.2008 a sum of Rs. 94,71,730/- was due including interest and other charges. The Bank accordingly prayed for recovery certificate for the said amount. Respondents 2 to 5 filed written statement admitting that they had applied for loan for the purchase of nine commercial vehicles but pleaded that vehicles were not delivered to them as prescribed in the agreement of non-delivery of the vehicles in time, which was due to delayed payment by the Bank to the dealer. The JCB stately was delivered on 13.2.2008 and vehicles on 6.2.2008 and the Bank was charging interest from 3.10.2007. Plea of wrong statement was also raised and it was urged that the vehicles were in possession of officials/Executive Engineer of PWD at Rohtak, Haryana. As per the respondents, they would have no objection in case the Bank took possession and sold these vehicles.

Since the Government of Haryana was also impleaded as one of the defendants and it had filed its written statement. It is stated that the construction work of OPD Block in PGIMS, Rohtak was allotted to respondent No. 2 firm and a sum of Rs. 1.70 crore was given to it as mobilization/equipment advance against an unconditional Bank guarantee. Respondent No. 2 purchased the equipments but failed to complete the project. Only a sum of Rs. 37.70 lacs had been recovered. The Bank guarantee offered was found to be fake. The claim of the State of Haryana is that the debt in question is a State debt or Crown debt and has preference over all other debt. It was also stated that the equipments are stored at the site of the project and in view of Clause 61 of the contract agreement all material on the site, plant, equipment would be deemed to be a property of the State. The vehicles and equipment were sold and a sum of Rs. 55.74 lacs has been released and deposited in a separate account.

On the basis of these pleadings, the Tribunal below formulated two points for determination. These were: whether the applicant Bank was entitled to recover amount from respondents 2 to 5 and whether the appellant, State of Haryana, is entitled to first charge over the vehicles/equipment. Since there is no dispute raised about the recovery of the amount and the dispute in the present appeal only relates to the charge of the appellant over the vehicles and equipment, the same alone would require consideration. The Tribunal below, after hearing the Counsel for the parties and on the basis of law laid down by the Hon'ble Supreme Court has held that the appellant does not have any charge on the equipment and machinery described and cannot realize any amount from respondents 2 to 5 by proceeding against these items. It is against this order that the State of Haryana has filed the appeal.

As already noticed, the only claim raised by the appellant before the Tribunal below was that the State debt which is a Crown debt would have priority over the other debts. The Counsel for the appellant has invited my attention to the pleading that the State had given mobilization advance to respondents 2 to 5 and as such in terms of the agreement was fully entitled to take possession of those items which were bought out from the advance given by the State.

The advance given by the appellant is mobilization/machinery advance. This will not be against any particular machinery or vehicle. The vehicles, equipment and machinery which were purchased was hypothecated with the respondent Bank. The question therefore would be as to which would have priority over this debt be it mobilization advance or the one advanced against the goods and machinery which were hypothecated with the Bank. I think this issue does not require much consideration as this view is fairly settled as per authoritative pronouncement of the Hon'ble Supreme Court.

As is held in number of judgments Crown's preferential right to recover debts over other creditors is confined to ordinary and unsecured creditors and this common law principle does not accord Crown a preferential right for recovery of its debts over the mortgage or pledge of goods of a secured creditor. In this regard reference can be made to the case of Dena Bank v. Bhikhabhai Prabhudas Parekh and Co., IV (2000) SLT 152 : 11 (2000) CLT 199 (SC) : AIR 2000 SC 3654, which has extensively dealt with doctrine of priority of Crown debt. It is held:

"What is the common law doctrine of priority or precedence of Crown debts? Halsbury, dealing with general rights of the Crown in relation to property states that where the Crown's right and that of a subject meet at one and the same time, that of the Crown is in general preferred the rule being "detur dignion" (Laws of England, 4th Edn. Vol. 8, Para 1076, at P. 666). Herbert States:

"Quando jus domini Regis et audit concurrent just regis praeferri debet.-- Where the title of the king and the title of a subject concur, the king's title must be preferred. In this case detur digniori is the rule.....where the titles of the king and of a subject concur, the king takes the whole.....where the king's title and that of a subject concur or are in conflict, the king's title is to be preferred." (Legal Maxims, 10th Edn. PP. 35-36)

This common law doctrine of priority of State debts has been recognised by the High Courts of India as applicable in British India before 1950 and hence the doctrine has been treated as 'law in force' within the meaning of Article 372(1) of Constitution. An illuminating discussion of the subject made by Chagla, C.J. is to be found in Bank of India v. John Bowman, AIR 1955 Bom. 305. We may also refer to the Full Bench decision of the Madras High Court in Manickam Chetiar v. ITO, AIR 1938 Mad. 360 : ILR 1938 Mad. 744 (FB) as also to two Judicial Commissioner's Court decisions in People's Bank of Northern India Ltd. v. Secy. of State for India, AIR 1935 Sind 232 and Vassan Bai Topandas v. Radhabai Tirath Das, AIR 1933 Sind 368....."

The Constitution Bench in the case of Builders Supply Corpn. v. Union of India, AIR 1965 SC 1061, has considered the principle of priority of Government debt. As per the Court, the principle of Government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well-recognized principle that the state is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. The Constitution Bench in this case noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in farce in the territory of British India at the relevant time within the meaning of Article 372(1) of the Constitution of India and therefore continues to be in force thereafter. Having reviewed the available judicial pronouncements the Court summed up the law as under:

"1. There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts.

The common law doctrine about priority of Crown debts which was recognized by Indian High Courts prior to 1950 constitutes 'law in force' within the meaning of Article 372(1) and continues to be in force.

The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the 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.

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."

The Constitution Bench decision in the case of Builders Supply Corpn's case (supra) has been followed by three-Judge Bench in Collector of Aurangabad v. Central Bank of India, AIR 1967 SC 1831. It has been held that the Crown's preferential right over other creditors is confined to ordinary and unsecured creditors. The relevant observations are as under:

"However, the Crown's preferential right to recovery of debts 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 pledge 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 v. Grover, (1832) 131 ER 563, 9 Bing 128, it has been held that the Crown has no precedence over a pledge of goods. In Bank of Bihar v. State of Bihar, (1972) 3 SCC 196 : AIR 1971 SC 1210, 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 Mortgage (TLL. 7th Edn. P. 386)--"It seems a Government debt in India is not entitled to precedence over a prior secured debt."

The above principle has been reiterated in a large number of cases. The issue being not in matter of controversy should not hold this Tribunal any further.

The Counsel for the appellant however has placed before me the judgment in the case of Union of India & Ors. v. Sicom Ltd. & Anr. He has especially referred to that part of the judgment where the Court has considered the case of Union of India v. Somasundram Mills (P) Ltd. & Anr., (1985) 2 SCC 40. In this case the Court while construing the provisions of Sub-sections (2) and (3) of Section 78 of CPC has held that it is a general principle of law that debts due to the State are entitled to priority over all other debts. It is further observed that if a decree holder brings a judgment debtor's property to sale and the sale proceeds are lying in deposit in Court, the State may even without prior attachment exercise its right to priority by making an application to the Executing Court for payment. The Court has also observed that if the state does not choose to apply to the Court for payment of its due from the amount lying in deposit in the Court but allows the amount to be taken away by some other attaching decree holder, the State cannot thereafter make an application for payment of its dues from the sale proceeds since there is no amount left with the Court to be paid to the State. While relying on these observations, the Counsel has failed to notice that the Court while referring to these observations has recorded that the Court in Somasundram's case was dealing with the conflict of interest between a secured creditor and unsecured creditor and this was not the question before the Court in the case of Sicom Ltd. In the case of Sicom Ltd. the Court has observed that:

"Generally, the rights of the Crown to recover the debt would prevail over the right of a subject Crown debt means the debts due to the State or the long, debts which a prerogative entitles the Crown to claim priority for before all other creditors, (See Advanced Law Lexicon by P. Ramanatha Aiyear (3rd Edn.) p. 1147). Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one. It is trite that when a Parliament or State Legislature makes an enactment, the same would prevail over the common law.

Thus the common law principle which was existing on the date of coming into force of the Constitution of India must yield to a statutory provision."

These observations relied upon by the Counsel for the appellant may not help him. The Crown priority over the secured debts as already noticed, has been considered in detail and the settled position is that the Crown debt has no priority over the secured debt. In view of this, the submission made by the Counsel for the State cannot be accepted. The judgment passed by the Tribunal below is just and legal and does not call for any interference. The appeal is accordingly dismissed.