1982 PLP 316 (PLC)

(1) Whether the defendant I has priority for the amount which accrued due to them from defendant 3 prior to the date of mortgage? (2) Whether the suit for injunction is not maintainable (3) Relief ? Learned advocates state 1hat they still do not wish to lead any evi dence. For arguments adjourned to 8th October, 1978."

2. Issue No. 1‑From the above statement of the learned counsel for the defendants Nos. 1 and 2 it seems that there is no dispute on the point that the plaintiffs have priority over the claim of the defendants Nos. 1 and 2 accruing subsequent to the date of mortgage. The only controversy bet ween the parties in the present suit is whether defendant No. 1 will have priority in respect of dues, which became due from defendant No. 3 prior to the date of mortgage. The parties have not led any evidence and have relied upon the plaint, written statement and the documents filed with the pleadings. The defendant No.1 have claimed that the defendant No 3 have failed to pay contribution for January, 1975, June, 1975 and March, 1976 amounting to Rs. 43,868.50. As this amount was certified by the defendant No. 1 to be recoverable as arrears of land revenue, the defen dant No. 2 issued notice to defendant No. 3 for payment of the afore stated amount and on 9thAugust, 1976 the defendant No. 2 attached the truck and machinery parts belonging to defendant No. 3 for recovery of the said dues.

3. Before considering the matter in detail first it would be necessary to determine the nature of the claim of defendant No.

1. This is a claim in respect of the contribution under the provisions of West Pakistan Employees Social Security Ordinance, 1965 which the defendant No. 3 as employers are liable to contribute to the defendant No. I which is utilised for the benefit and welfare of the employees. Section 68 of the West Pakistan Employees Social Security Ordinance, 1965 (West Pakistani Ordinance of 1965) provides that in any proceeding of insolvency against a person or proceedings for the winding up of a company, any contribu tion or other amount payable under this Ordinance by such person o company shall be deemed to be included among debts to be paid in prio rity to all other debts. Therefore under the Ordinance priority has been granted only in insolvency or winding up proceedings. It does not pro vide priority in respect of claims in other proceedings. If the intention of the Legislature would have been to give priority to the dues under the Ordinance overall other debts and claims then the same would have been provided in it. Section 55 further provides that any amount recoverable by the defendant No. 1 may be recovered as arrears of land revenue. Section 55 of West Pakistan Employees Social Security Ordinance, 196 only provides for a procedure for recovery of dues as a land revenue. It does not by itself convert the Social Security Contribution into a land revenue or a charge on the land property itself.

4. Mr. J. H. Rahimtoola, the learned counsel for the plaintiffs has contended that merely because the amount is due to the defendant No. 1 it does not' give automatically a priority over the rights unless some action by way of attachment has been taken by the defendants Nos. 1 and

2. In a nutshell his contention is that unless a distress or attachment is issued the defendant 1 cannot claim priority over the secured creditors. In support of his contention the learned counsel has relied upon the cases of Federation of Pakistan v. Pioneer Bank Ltd. (P L D 1958 Dacca 535) and Casbered v. The Attorney‑General (146 All E R 850,). 1n the first case on the death of a contractor one of the legal heirs with a view to raise fund for the firm made arrangement with the Bank by which the Bank was to advance him to the minimum of Rs. 60,000 on overdraft account on the security of all outstanding bills and amounts payable to the firm by the M. E. S. Department. Accordingly on 12th October, 1944, hypothecation deed was executed on behalf of the firm. In 1945 and subsequent years, for' recovery of Income‑tax, the Collector of Dacca issued certificate on behalf of Income‑tax Department and attached the dues of the firm from the M. E. S. Department. The bank preferred an objection to the attach ment which was disallowed. The Bank then instituted a suit for a declaration that they had preferential right over the dues to the firm from M. E. S. Department. The question for consideration was whether the Government debt takes precedence over the hypothecation debt. It was held that :‑ "Only when demand is made under sections 29 and 45 of the Income‑tax Act, it becomes a debt to the Government. It is, therefore, clear that in 1944, when the hypothecation deed was executed in favour of the Bank, no debt was due to the Government, and that the Government's lien to the attached money commenced from 1945." It was further held "that the attachment or sale for a Government debt would not affect a mortgage which had been created prior to the attachment or sale." Reliance was placed on I L R 7 Mad. 434; I L R 28 Mad. 429 ; I L R 45 Cal. 653; A I R 1935 Mad. 882 and I L R 34 All. 223 (PC). The starting point of conflict of interest for priorities between the Government and a private party is from the date of the attachment and not when the claim has accrued. In this regard reliance has been placed err‑‑146 English Reports 850 where following observation was made :‑‑ "It is quite clear that Mr. Jones was, before this deposit was made, liable to the process of the Crown in respect of the money which he received as Collector of the taxes, and which was in his hands; but it does not follow that he was therefore that kind of debtor to the Crown, which would bind these lands so as to effect the exist ing, equitable, or legal interest, of any third person in them. If he were a debtor to the Crown of record, or one of the persons des cribed in the 13th of Elizabeth, there is no doubt at all, that, whe ther there were an equitable or a legal mortgage on his lands, it would not have affected the Crown; for the Crown would have a right, the moment he became a debtor of record, or came within the statute of Elizabeth, to have seized his lands, although they should have been subsequently mortgaged; but if he was not a debtor on record (as he clearly was not for his debt was never put on record) nor had given bond to the Crown, and if he was not within the statute of Elizabeth, which is at least the only real ques tion in this case, then he was merely an ordinary simple‑contract debtor and the Crown had no right to the estate at the time of equitable incumbrance, nor until he became a debtor by record, which he did not until the inquisition was taken, and that was not till a considerable time after the deposit was made; and indeed it is not even alleged that he was a debtor of record at that time." In this regard it will be advantageous to refer to A I R 1935 Sind 232, where one Shahani executed 4 document in favour of the Government agreeing to pay Rs. 26,100 in instalment in respect of an Abkari license by him from Government for sale of liquor, for due payment. Two per sons stood surety for him. One of the surety possessed large stock of liquor stored in custom's bounded warehouses. The stock was hypothe cated to the Bank on 20th October, 1928. On 1st March, 1929, Shahani expressed his inability to pay the instalment which fell due on 1st Janu ary, 1929. The Collector of Karachi requested the Collector of Customs to detain the goods lying in the bounded warehouse under section 34, Abkari Act and under section 154, Land Revenue Code. In the meantime the Bank obtained an award in respect of amount due on pro-note which was filed in Court. A suit was also filed by Bank in respect of hundis and obtained an order of appointment of receiver realized Rs. 9,869‑I1‑

10. The Collector of Karachi then made an application to the Court for pay ment to him of the sale‑proceeds in priority to the mortgage claim of the Bank on the ground that the Crown was a preferential creditor. It was observed as follows :‑ "Mr. Pratab Roy has been unable to cite any authorities in support of the proposition that according to Common Law of England or the principle of equity and good conscience applicable to India the Crown has a preferential right over a mortgagee or pledgee of goods. On the contrary the authorities are the other way. It is only in cases where Crown's right and that of the subject meet at one and the same time that the Crown is in general preferred, the rule being "detur digniori" Halsburys Laws of England Vol. 11 para 749; 1933 Sind 368,But 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 pre vailed already." In the case of Kunwar Ragho Prasad v. Lala Mewa Lal (159 1 C 177 (P C), Lord Macnaghten observed as follows .‑‑ "It is only when claims of "common persons" (to use an old expres sion) "concur" or come into competition that the Crown is prefer red. The Crown has no more right than a common person to seize A's property and apply it in or towards the discharge of a debt due from B. That is not a question of law. It is a matter of common justice and it may be added, of common honesty." The consensus therefore is that the right to claim priority by the Government will arise only from the date when attachment or process is issued against the property and not from the date when the dues have accrued. It is well settled that unless otherwise provided by statute, mere accrual of dues or debt does not entitle the Government to claim priority over a mortgagee, pledgee or a secured creditor. The preferential right of the Government unless otherwise provided by the statute perfects the moment any process or attachment‑against the property of the debtor is issued. A historical analysis of the problem supports the view that the con cept‑of priority of debts owing to the State has a firm recognition in jurisprudence. The rationale being that the destination for State debts and dues when recovered is the State treasury and unless Government is able to recover taxes and debts it would not be able to discharge mary Governmental function. The principle in the words of Mukerji J. in Murli v. Asoomal do Co. (A I R 1955 Cal. 423) is as follows:‑ "If the collection of such revenue was to be defeated by private claims as between subjects then it will be embarrassing for the public Exchequer and will complicate, harass and impede the basic func tion of the State. That is the juristic reason based on common sense for the growth of the constitutional doctrine that the revenue claims of the State must have precedence over all other private claims." This claim of priority unless otherwise provided by statute, will not defeat the right of the mortgagee, pledgee and secured creditors which has perfected before the Government has attached the property or issue process against it. The concept of State has radically changed inasmuch as the State are now engaged owning industrial and commercial undertakings an establishments, doing business, running industries which once upon a time was done by private citizens. In such cases where the State becomes creditor m respect of its commercial and industrial activity, no priorit can be given to such State debts over other private debts. In view of the above discussion the defendant No. 1 cannot as priority in respect of their claim which accrued prior to the mortgage as no process or attachment was issued against the property till the same had been mortgaged. The notice by defendants No. 2 was issued and pro perty was attached on 25th May, 1978. On this date the plaintiffs had a registered mortgage deed, floating charge and hypothecation on all the properties in their favour and therefore the question of claiming priority by defendant No. 1 over the claim of the plaintiffs does not arise.

4. Issue No. 2‑Issue No. 2 has not been pressed by the learned counsel for the defendants.

5. Issue No. 3‑In the result the suit is decreed and it is declared that plaintiffs as mortgagees have the first legal charge overall the properties of Messrs National Spinning Mills Ltd. mentioned in the mortgage deed the and defendants are restrained from seizing or disposing of the property for recovery of the dues of the defendant No.

1. However, they would be permitted to sell the attached properties provided the sale is affected sub ject to the rights and claims of plaintiffs. There will no order as to costs.