Evolution of Land Transfer Regulations under the Karnataka PTCL Act

In the former State of Mysore, the grant of government lands to citizens was regulated by the Mysore Land Revenue Code and Rules, as well as the Mysore Land Grant Rules. The concept of “restricted tenure” appears to have emerged to facilitate the swift disposal of darkasths (land grants) and to protect certain members of the Depressed Classes (did not include all communities classified as Scheduled Castes/Tribes). Under this concept, grantees were required to hold the land for a specified period, which was later extended from 10 to 20 years, and were prohibited from alienating the land without the prior permission of the Deputy Commissioner1.

Furthermore, with the repeal of Rule 30 of the Karnataka Land Grant Rules, 1968, and Rule 93-A of the Karnataka Land Revenue (Amendment) Rules, 1967, and the introduction of Rule 29A on September 17, 1974, a new legal framework was established, stipulating that no alienation of granted land could occur without prior permission or sanction from the government1. In line with this development, the Legislature enacted the Karnataka Scheduled Castes and Scheduled Tribes (Prohibition of Transfer of Certain Lands) Act, 1978 (PTCL Act) on January 1, 1979. This act was designed to protect the interests of Scheduled Castes and Scheduled Tribes grantees, ensuring that the purpose of the land grants was upheld and that these communities were safeguarded from exploitation.

The statute came into force on January 1, 1979, with a succinct 12 sections that comprise an array of provisions pertaining to the transfer, alienation, resumption and restoration of lands granted to the Scheduled Castes and Scheduled Tribes communities, hereinafter referred to as SC/ST communities.

A Few Key Provisions of the PTCL Act:

 
Definition of grant land under the PTCL Act:

Section 3(b) of the PTCL Act defines “Granted Land” as any land provided by the government to an individual belonging to a Scheduled Caste or Scheduled Tribe. This definition also includes land allocated or granted under existing laws related to agrarian reforms, land ceilings, or the abolition of inams, excluding those related to hereditary offices or rights. The term “granted” is to be understood in this context. 

Prohibition on Transfer of Grant Lands under Sections 4 and 5 of the PTCL Act:

Section 4 reinforces the grantee’s right to hold the land by imposing a restriction on transferring the granted land without prior government permission. Section 5 grants the Assistant Commissioner the authority to take possession of any such land that has been transferred, including evicting those in possession if necessary, and to declare the transfer null and void. In essence, the Assistant Commissioner is empowered to reverse the transfer and restore the land to the original grantee.

A Slew of Circulars by the Government of Karnataka on Alienation, Transfer and Sale Permission:

The Government of Karnataka, through a circular dated February 21, 19892 directed the Deputy Commissioner to provide appropriate recommendations for grantees seeking to alienate their land, provided that the non-alienation period had been completed. Additionally, a condition was imposed on the grantees to use the sale proceeds to purchase agricultural land. Further, in a circular dated January 11, 1990, the Deputy Commissioner, Assistant Commissioner, and Tahsildar were instructed to ensure that purchasers were not disqualified from holding agricultural land under the existing land reform laws.

In 2006, the following guidelines for granting sale permission were implemented through a circular:

  • Applications within the first 5-year period were to be rejected, as land granted within this duration was not eligible for alienation.
  • For granted lands held between 5 and 25 years, each case was to be evaluated individually, taking into account the grantee’s family needs. If the Deputy Commissioner decided to permit the alienation, the grantee was required to pay an amount equal to fifty percent of the market value of the land, as determined by the Deputy Commissioner, to the government on the date of sanction, in accordance with Section 9(1)(i) of the Karnataka Land Grant Rules, 1969.
  • For cases where the stipulated time had been fulfilled, permission to alienate could be granted, considering the grantee’s family needs. However, such alienation was to be conditioned upon the grantee purchasing agricultural land using the proceeds from the sale. Granting permission in these cases was at the discretion of the Competent Authority and not mandatory.

Subsequently, a checklist was issued through a Circular dated December 27, 2010, outlining over 20 criteria for landowners seeking permission to sell land under the provisions of the Karnataka Scheduled Castes and Scheduled Tribes (Prevention of Transfer of Certain Lands) Act, 1978. Following this, a Circular dated March 10, 2011, bearing No. RD880 LGP 2010, was issued, requiring the proper documentation of the non-agricultural income of landowners seeking sale permission and mandating the rejection of applications that did not meet the specified criteria.

Additionally, a Circular dated January 1, 2020, introduced new conditions, which included:

  • Mandatory land purchase: The grantee was required to use the sale proceeds to purchase land.
  • Submission of Sale Deed: The grantee had to submit the Sale Deed for the purchased land, after which the Sub-Registrar would permit the registration of the sale of the grant land.
  • Khata transfer: The Revenue Inspector or Village Accountant was responsible for transferring the khata of the grant land to the prospective purchaser, following verification of the Sale Deed for the land purchased by the grantee.

Furthermore, on the directions of the Hon’ble High Court of Karnataka, the following advisory was issued:

  • The grantee or their legal heirs were required to submit applications before the competent authority.
  • The advance payment made during the Agreement to Sell needed to be verified as part of the sale process.
  • It was mandated that all transactions during the sale process be conducted via Account Payee Cheque or Demand Draft.
  • Pursuant to the Order dated August 12, 2021, and the Order in W.P. 14746/2020 (SCST) by the Hon’ble High Court, the State Government was directed to ensure that an updated list of granted lands be provided to registering officers under the Indian Registration Act, 19082.
Circular on Period of limitation to invoke PTCL Provisions:

A circular dated February 15, 2022, offering a perspective on applications for restoration made more than 25 years, clarified that the authorities under the PTCL Act, 1978, should deal with the application for resumption according to the facts and circumstances of each case. Given the absence of a prescribed limitation period for such applications, Civil Appeal No. 1390/2009 (Nekkanti Rama Lakshmi vs. State of Karnataka) was decided in favor of the purchaser. The circular also included excerpts from the advisory issued by the Law Department, as outlined below:

“…..Even Hon’ble Apex Court in Nekkanti Rama Lakshmi case has not indicated as to how much time is ‘reasonable time’ to invoke the provisions of PTCL Act. The term reasonable time depends on the facts and circumstances of each case. Hence, fixing a particular period of time so as to apply to all types of matters, irrespective of the facts and circumstances of the case, to invoke the provisions of the PTCL Act may not appear proper. However, if the administrative department wants to fix the limitations/time to invoke the provisions of the PTCL Act, as far as the period of limitation/time to be fixed is concerned, administrative department may take its own decision after going through the above noted materials.” Based on this, the circular directed competent authorities to consider the case explicitly without deviating from the purpose of the provisions of the PTCL Act2.

Amendments to PTCL Act

The PTCL Act was amended in 1984, 1992, and most recently in 2023. The 2023 Amendment to the Act introduced changes to Section 5 by adding clauses (c) and (d), which stated that there was no time limitation for invoking the provisions of the Act, regardless of any other law. Further, the provision applied to all cases pending before competent authorities and courts adjudicating under the section. In effect, the amendment specified that there will be no time limit for the grantees to approach courts and reclaim assets transferred to others without the government’s approval.

Although no constitutional challenge to the Amendment has been raised yet, the Karnataka High Court, in its judgment in the case of Jayalakshmamma and Ors. v. Deputy Commissioner, Tumkur and Ors., rejected a request to restore land under the PTCL Act. The rejection was based on the fact that the application was filed more than 25 years after the PTCL Act’s enactment, and the Supreme Court’s ruling in Nekkanti Rama Lakshmi v. State of Karnataka and Anr. as shared above established that proceedings under the PTCL Act must be initiated within a’reasonable time’. The judgment indicates that the Karnataka High Court did not consider the recent amendment to the PTCL Act and dismissed the writ appeal accordingly.

Further, in Basavraj v. Deputy Commissioner, the high court said that once an application filed by the grantee under Section 5 of the PTCL Act is rejected, the only option available is to challenge such an order, and no fresh application can be filed by such a grantee and/or their legal heirs.

Introduction of Rule 6 in the PTCL (Amendment) Rules, 2024

The Karnataka Scheduled Castes and Scheduled Tribes (Prohibition of Transfer of Certain Lands) (Amendment) Rules, 20243, introduce the addition of Rule 6 to the Karnataka Scheduled Castes and Scheduled Tribes (Prevention of Transfer of Certain Lands) Rules, 1979. These amendments will take effect from the date of their publication in the Official Gazette.

Rule 6 outlines the process for obtaining permission to transfer or acquire grant land under Section 4(2) of the PTCL Act, as follows:

  1. Application Submission: The grantee or their legal heirs must submit an application to the Office of the Tahsildar.
  2. Tahsildar’s Role: The Tahsildar will investigate, verify the submitted documents, and prepare a report based on their findings, which will then be submitted to the Assistant Commissioner (AC).
  3. Assistant Commissioner’s Review: Upon receiving the Tahsildar’s report, the AC may conduct further inquiries to ensure there is no coercion, misrepresentation, fraud, or incorrect valuation of land. The AC will then provide recommendations to the Deputy Commissioner (DC) on whether to approve or deny the transfer request.
  4. Deputy Commissioner’s Actions: The DC will review the recommendations and reports, verify the records, and forward the application to the Revenue Commissioner (RC).
  5. Revenue Commissioner’s Recommendations: The RC will examine the application and provide recommendations to the Principal Secretary (Revenue). Based on the recommendations from the AC, DC, and RC, the Principal Secretary may approve the transfer. The RC will then issue an order granting permission, and the AC will remove the PTCL tag from the land to facilitate the transfer.
  6. Right to Appeal: Sub Rule 10 allows applicants who are aggrieved or denied permission to file representations before the Principal Secretary (Revenue) for a review within 30 days of the order.

Conclusion

The Karnataka Scheduled Castes and Scheduled Tribes (Prohibition of Transfer of Certain Lands) (Amendment) Rules, 2024, are introduced to address the skepticism and ambiguity surrounding grant lands under the PTCL Act. These rules eliminate the requirement for a No Objection Certificate for the sale of lands covered by the PTCL Act. However, the government has yet to establish digital platforms for the implementation of services outlined in Rule 6 of these amended rules.

Also considering the fact that in the Basavraj case cited above, the revenue authorities were forced to determine the issue of the lack of required documents, the court also issued general directions, including digitisation of records related to land grants. The court said:

“Once the said documents are digitised, all the documents are to be hyperlinked with each other so that all the documents are accessible from any particular document or location, going historically backward or forward. Entries relating to the grant with reference to the grant and concerned documents are to be entered into the RTC, and the documents are to be accessible by way of hyperlinks. A master e-registry is to be prepared in respect of each survey number village-wise, with the documents being accessible by hyperlinking. Search to be capable of, on the basis of the name of the district, village, survey number, grantees name, etc., the facility to apply and obtain e-certified copies of all the documents to be made available.”

To streamline the process, the Government of Karnataka has introduced the Karnataka Land Revenue (Second Amendment) Act, 2024. This Act creates a Revenue Commissionerate at the state level and establishes the position of Revenue Commissioner (Revenue, Land Acquisition, Resettlement and Rehabilitation, and Social Security) within the I.A.S. cadre. The objective is to improve efficiency and decentralize administrative powers.

References:

  1. Indian Kanoon, https://indiankanoon.org/doc/245136/ 
  2. Land Grants 1 of Revenue Department, Government of Karnataka, https://kandaya.karnataka.gov.in/storage/pdf-files/Land%20grants%201/PTCL%20%E0%B2%95%E0%B2%BE%E0%B2%AF%E0%B3%8D%E0%B2%A6%E0%B3%86%E0%B2%AF%20%E0%B2%95%E0%B3%81%E0%B2%B0%E0%B2%BF%E0%B2%A4%E0%B3%81%20%E0%B2%B8%E0%B3%81%E0%B2%A4%E0%B3%8D%E0%B2%A4%E0%B3%8B%E0%B2%B2%E0%B3%86%E0%B2%97%E0%B2%B3%E0%B3%81.pdf 
  3. Karnataka Rajayapatra, https://erajyapatra.karnataka.gov.in/WriteReadData/2024/7340.pdf 

The Karnataka Scheduled Castes and Scheduled Tribes (Prohibition of Transfer of Certain Lands) Act, 1978 (PTCL Act) was enacted on January 1, 1979  to protect the interests of Scheduled Castes and Scheduled Tribes grantees, ensuring that the purpose of the land grants was upheld and that these communities were safeguarded from exploitation.

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Turning a Corner With Live Streaming of Constitutional Matters

On September 27, 2022, India’s Supreme Court began to live-stream hearings of all matters taken up by its constitutional benches, making them fully accessible to the public in real-time. This follows a decision that was first taken in September 2018. Although the pandemic caused a delay in the implementation of this decision, it is noteworthy that this decision reportedly had the support of all judges (including CJIs). This speaks to the judiciary’s willingness to adapt to change and play its role in strengthening India’s democratic traditions and enhancing the efficiency of its justice delivery system, which bears a disproportionately huge burden given India’s demography.

By and large, courtroom proceedings around the world are not permitted to be legally recorded, let alone broadcast. This decision by India’s highest court of law makes us one of the few countries (if not the only one) where certain types of hearings are now open to audiences worldwide. I believe this is a good move that has a number of benefits, although given the increasingly digital world we live in, there are also some downside risks.

Benefits

A key malaise that has long beset India’s justice delivery system is the tendency of lawyers of one or both parties to seek frequent adjournments as a matter of routine strategy. While this may be legitimate in some cases (e.g., awaiting evidence, unavailability of witnesses, etc.), it is also blatantly used as a tactic to cover for lack of preparation, to buy time, or simply delay justice delivery. Not for nothing has the Indian judiciary been accused of abetting “taareekh pe taareekh” (moving from one date of hearing to another with no substantive progress towards a verdict).

Allowing the public to view proceedings will help ordinary citizens understand the process better, and thus build more confidence in the judiciary. With the performance and reputations of at least some advocates under public glare, we can expect that they will be better prepared to argue matters. Advocates on Record (AOR) will expect to be fully briefed in time, forcing lawyers advising the parties to do their homework thoroughly. All this will hopefully contribute to reducing the pendency of cases because neither party (or their lawyers) will want to be seen as the ones responsible for delaying justice delivery.

The decision to live-stream matters being heard by constitutional benches will have other benefits as well. Many clients who are part of multi-party matters, class action suits or public interest litigations don’t always get updated with accurate information about what transpired. Livestreaming provides access to clients who are not in a position to physically attend the hearing; they can issue new instructions to their lawyers if necessary. This is important because matters that are typically heard by constitutional benches are those that have far-reaching implications for Indian society and the country.

Law students and young professionals at the start of their careers can learn courtcraft by watching experienced advocates/senior advocates and judges in action (how they question advocates to identify irrelevant arguments, time-wasting tactics, etc.). This will be of particular advantage to aspiring lawyers from outside the National Capital Region, for whom traveling to Delhi or interning with Supreme Court advocates is not affordable or otherwise possible.

The Down-sides

However, in the increasingly digital world we live in, such live-streaming also has some potential risks. Social media can be misused to post partial or incorrect information, and this can trigger law and order risks. Social media may be used by vested interests to malign advocates or members of the judiciary, which can vitiate not just the proceedings, but also public perception. There is also the risk of hackers, who can disrupt the streaming in various ways.

Open dialogue, transparency and fairness are basic tenets of a healthy democracy. This major step taken by India’s Supreme Court has the potential to improve India by enhancing the citizenry’s understanding of and appreciation for the rule of law. It can also raise the standards of the next generation of lawyers. Constitutional benches take up weighty matters of national importance, so I hope this step toward ushering in greater transparency will help fill the dangerous cracks that have emerged in our pluralistic country’s social fabric over the last 75 years.

By and large, courtroom proceedings around the world are not permitted to be legally recorded, let alone broadcast. This decision by India’s highest court of law makes us one of the few countries (if not the only one) where certain types of hearings are now open to audiences worldwide.

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The Liquidator – A Demigod Under the Insolvency and Bankruptcy Code, 2016?

Recently on August 28, 2022, a three-judge bench of the Supreme Court of India delivered a judgement in R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others[1], interpreting the provisions of IBC concerning the powers of the liquidator vis-à-vis mode of sale of assets by the liquidator. This watershed judgement reaffirms the powers available to the liquidator to decide the best mode of sale for maximising the value of assets of the CD.

Under the Insolvency and Bankruptcy Code, 2016 (“IBC”), an order for liquidation is passed by an Adjudicating Authority, i.e., the National Company Law Tribunal (“NCLT”), when the corporate insolvency resolution process (“CIRP”) of a corporate debtor (“CD”) fails.

Liquidation is initiated when the NCLT[1]:

  • Does not receive a resolution plan during CIRP.
  • Rejects the resolution plan submitted under Section 31 of the IBC.
  • Passes an order for liquidation based on the approval of Committee of Creditors (“CoC”).
  • Passes an order for liquidation resulting from an application made by an aggrieved person for violation of the resolution plan.

The liquidator is appointed vide the liquidation order passed by the NCLT, and ordinarily, the resolution professional appointed for conducting the CIRP will be appointed as the liquidator. A liquidator, on his appointment, gets the powers of the board of directors, key managerial personnel, and the partners of the corporate debtor[2]. Among other things, a liquidator can verify the claims of all the creditors, can take into his custody or control all the assets, property, effects, and actionable claims of the corporate debtor, etc.[3] While a resolution professional acts under the instructions of the CoC during a CIRP, the liquidator is not bound by the opinion or advice provided by the stakeholders’ consultation committee[4] (“SCC”) during the liquidation process of a CD. As a result, under the scheme of the IBC, the liquidator has been given broad powers to ensure that the liquidation of a corporate debtor’s assets can be carried out with minimal disruption in order to maximise the realisation from such assets.

Facts in Brief:

The CD in R.K. Industries (Unit-II) LLP[6] was ordered to be liquidated vide order of NCLT dated April 25, 2019. Following that, the liquidator held 5 (five) e-auctions, the first 4 (four) of which failed auctions were for the sale of consolidated assets of the CD, and the fifth one offered sale of the assets on a stand-alone basis; however, the majority of assets did not attract any interest in the fifth e-auction. Under the circumstances, an application was made to the NCLT for conducting a private sale which was granted and the “Swiss Challenge Process”[7] was adopted for the sale of certain assets of the CD (Dahej material) through a private sale. The first Swiss Challenge Process was unsuccessful, and so a second one was conducted wherein the appellant submitted the bid, an earnest money deposit, and an affidavit stating that it will be bound by the terms of the Swiss Challenge Process[8].

The terms of the Swiss Challenge Process (Anchor Bid Document), inter alia, were:

“e. It is clarified that issuance of the Process Document does not create any kind of binding obligation on the part of the Liquidator or ABG to effectuate the sale of the assets of ABG.”

xxx xxx xxx

“x. The Liquidator reserves the right to cancel, abandon or reject a Bidder/Successful Bidder at any time during the process, and the Liquidator also reserves the right to disqualify a Successful Bidder, in case of any irregularities found such as ineligibility under the I & B Code.”

xxx xxx xxx

“y. Liquidator of ABGSL, reserves the right to suspend/abandon/cancel/extend or modify the process terms and/or documents and/or reject or disqualify any Bidder at any stage of process without assigning any reason and without any notice liability of whatsoever nature.”   

While the second Swiss Challenge Process was being challenged before the NCLT, Welspun Steel Resources Private Limited (Respondent No. 7) submitted a bid much higher than the appellant for the purchase of both the Dahej Material and the land (Shipyard). SCC was of the view that a composite sale of the Dahej Material and the Shipyard would be more beneficial than the sale of the Dahej Material alone. When the hearing for the application filed by the appellant was taken up, NCLT passed an order on August 16, 2021, permitting the liquidator to go in for Private Sale of all the assets of the Corporate Debtor and complete the entire sale process in consultation with the SCC within a period of three weeks. The liquidator was also directed to permit all the parties before the NCLT to participate in the bidding process.

The order of the NCLT was challenged before the National Company Law Appellate Tribunal (“NCLAT”) and the NCLAT held that the second Swiss Challenge Process would stand cancelled, and that the private sale process should be undertaken in accordance with the directions contained in NCLAT’s judgment and as per relevant legal provisions.

Aggrieved by NCLAT’s judgement, the appellant in R.K. Industries (Unit-II) LLP[9] filed a limited appeal with regard to the directions issued in the penultimate paragraphs of NCLAT’s judgement of restarting the process of private sale after issuing an open notice to all prospective buyers instead of confining the same to the parties who had earlier participated in the process.

Issues:

The Supreme Court framed the following issues[10]:

  1. Whether the liquidator was justified in discontinuing the Second Swiss Challenge Process for the sale of a part of the assets of the CD, wherein the appellant was declared an anchor bidder, and opting for a private sale process through direct negotiations in respect of the composite assets of the Corporate Debtor?

If so, was the NCLAT justified in directing the liquidator to restart the entire process of Private Sale after issuing an open notice to prospective buyers instead of confining the process to those parties who had participated in the process earlier?

Holding of the Supreme Court:

The Supreme Court expounded the following holdings on the aforementioned issues:

  • On a conjoint reading of various provisions of the IBC and Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), the liquidator is authorised to sell the immovable and movable property of CD in liquidation through a public auction or a private contract, either collectively, or in a piecemeal manner.
  • The liquidator can apply to the NCLT for appropriate orders and directions considered necessary for the liquidation of the CD.
  • The liquidator is permitted to consult with the stakeholders who are entitled to a distribution of the sale proceeds. However, the proviso to Section 35(2) of the IBC makes it clear that the opinion of the stakeholders will not be binding on the liquidator. Though the advice offered is not binding on the liquidator, he must give reasons in writing for acting against such advice.
  • Regulation 33 of the Liquidation Regulations is couched in a language that shows that ample latitude has been given to the liquidator, who may “ordinarily” sell the assets through auction, thereby meaning that, in peculiar facts and circumstances, the liquidator may directly go in for a private sale.
  • The liquidator can approach the NCLT in terms of Section 35(1)(n), IBC read with Regulation 33(2) of the Liquidation Regulations to seek permission to sell the assets of the CD through Private Sale.
  • The issuance of the Anchor Bid Document does not create any binding obligations on the liquidator to proceed with the sale of the assets of the CD; the Anchor Bid Document does not constitute an offer, a commitment or an assurance of the Liquidator. It is a well-settled principle that in matters relating to commercial transactions, tenders, etc., the scope of judicial review is fairly limited, and the court ought to refrain from substituting its decisions for those of the tendering agency.
  • The Swiss Challenge Process is just another method of private participation that has been recognised by this Court for its transparency. Ultimately, the IBC has left it to the discretion of the liquidator to explore the best possible method for selling the assets of the CD in liquidation, which includes a private sale through direct negotiations with the object of maximising the value of the assets offered for sale.
  • IBC enjoins the liquidator to sell the immovable and movable assets of the CD in a manner that would result in maximisation of value, lead to a higher and quicker recovery for the stakeholders, cut short the delay, and afford a guaranteed timeline for completion of the process.
  • IBC empowers the liquidator to take an independent decision for the sale of the assets of the CD in liquidation.

Based on the above observations and holding, the Supreme Court ruled in R.K. Industries (Unit-II) LLP[11] that there was good reason for the liquidator to have halted the Second Swiss Challenge Process midstream and approached the NCLT armed with an offer of Rs. 675 crores received from Welspun, who had shown interest in the composite sale of the Dahej assets. The Supreme Court added that the Appellant was not able to demonstrate that the decision of the liquidator to discontinue the Second Swiss Challenge Process and go in for a private sale through direct negotiations with prospective bidders was a mala fide exercise.

The Supreme Court went on to state that from a reference to the Anchor Bid Document, it was apparent and explicit that even if the public auction had been completed and the respondent was the highest bidder, no right had accrued to him till the confirmation letter had been issued to him. The Court added that the decision taken by the liquidator cannot be treated as arbitrary, capricious, or unreasonable for interference by the Supreme Court and that it is a purely commercial decision centred on the best interest of the stakeholders. The stakeholders have unanimously endorsed the view of the liquidator, and thus it was not for this Court to undertake a further scrutiny of the desirability or the reasonableness of the said decision or substitute its own views for those of the liquidator.

As a result, the impugned NCLAT[12] judgment was quashed and set aside to the extent that it modified the NCLT[13] order and directed restraining of the private sale process. The Supreme Court also ruled that the liquidator should proceed with the private sale of the CD’s composite assets without further delay and conclude it as soon as possible. All the eligible bidders who have made Earnest Money Deposits would be entitled to participate in the negotiations to be conducted by the liquidator for privately selling the consolidated assets of the CD. The Supreme Court concluded that the liquidator must bring the process of private negotiations to a logical conclusion and close it within four weeks of its order.

Conclusion

The wide amplitude of the liquidator’s powers to determine the mode of sale has been fortified in R.K. Industries (Unit-II) LLP. This decision of the Supreme Court has also been followed recently in Sauria Corporation vs. Kohinoor Pulp & Paper Private Limited[14], wherein the NCLT stated that “it is the Liquidator who has to take a call on what mode of sale is in the best interest of maximization of the value of the assets. He may not be bound by the recommendations or advice of the Stakeholder’ Consultation Committee, however, in exercising the process of consultation, if something better transpires, he can take that into consideration.”

R.K. Industries (Unit-II) LLP’s decision has made it lucid that a liquidator is armed with powers to determine the mode, method and manner of sale of assets in liquidation and is not bound by the advice of stakeholders. Also, the Supreme Court is attempting to exercise minimal judicial intervention in matters pertaining to the IBC and has historically allowed the CoC and liquidators to exercise their commercial wisdom in matters relating to CIRP and liquidation of a CD. However, it is pertinent to note, the judiciary has also made it crystal clear that it will intervene in cases where the decision(s) of the CoC or the liquidator, among other things, are tainted with arbitrariness, capriciousness, or are unreasonable. R.K. Industries (Unit-II) LLP is yet another step to ensure that the process under the IBC is conducted efficiently and in a time-bound manner to ensure that the stakeholders get maximum value from assets under liquidation.

[1] 2022 SCC OnLine SC 1124.

[1] Section 33 of IBC.

[2] Section 34(2) of IBC.

[3] Section 35 of IBC.

[4] Constituted under Regulation 31A of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[5] 2022 SCC OnLine SC 1124.

[6] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124.

[7] A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project. The government then puts the details of the project out in the public and invites proposals from others interested in executing it. On the receipt of these bids, the original contractor gets an opportunity to match the best bid (Aarati Krishnan, All you wanted to know about…Swiss Challenge The Hindu BusinessLine (2018), https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-swiss-challenge/article24194034.ece (last visited Sep 19, 2022)).

[8] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124, para 2 and 3.

[9] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124.

[10] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124, para 27.

[11] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124, para 54.   

[12] Order dated 10 December, 2021 in IA No. 273 of 2021.

[13] Order dated 16 August, 2021.

[14] Order dated August 31, 2022 in I.A (IB) No. 892/KB/2022 in C.P. (IB) No. 511/KB/2018, National Company Law Tribunal – Kolkata Bench-I.

The decision has made it lucid that a liquidator is armed with powers to determine the mode, method and manner of sale of assets in liquidation and is not bound by the advice of stakeholders. Also, the Supreme Court is attempting to exercise minimal judicial intervention in matters pertaining to the IBC and has historically allowed the CoC and liquidators to exercise their commercial wisdom in matters relating to CIRP and liquidation of a CD. 

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Impact of Supreme Court ruling pertaining to calculation of Provident Fund contribution on Allowances

The Hon’ble Supreme Court, in a recent judgement, answered the question of whether “special allowances” would fall within the expression “basic wages” for Provident Fund (PF) contribution in the affirmative. Interpreting the provisions of Employees Provident Funds and Miscellaneous Provisions Act, 1952 (“PF Act”) as a beneficial social welfare legislation, the Court affirmed the PF authorities’ factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution to the provident fund account of the employees.

In essence, the Court reiterated the principle laid down in prior rulings that where the wage is universally, necessarily and ordinarily paid to all across the board, such emoluments are basic wages and employers had to expressly prove the special treatment in the special allowance for it to be kept out of the purview of calculations for PF purposes.

 

Background

The PF Act is a social security legislation enacted to help ensure that both employees and employers contributed towards a superannuation fund for the purpose of retirement benefits. Per the PF Act, all employees are required to contribute 12% of their basic wages, dearness allowance, cash value of any food concession and retaining allowance, if any with the employer contributing a matching 12%.

 

Basic Wages under Section 2(b)(ii) read with Section 6 of the PF Act is defined as “all emoluments which are earned by an employee while on duty or [on leave or on holidays with wages in either case] in accordance with the terms of employment and which are paid or payable in cash to him, but does not include:

  • the cash value of any food concession;
  • any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus, commission or any other similar allowances payable to the employee in respect of his employment or of work done in such employment;
  • any presents made by the employer.”

The phrase “or any other similar allowance” has not specifically been defined in the PF Act or related schemes and has thus been a subject of litigation for several decades. Over the year, companies have been structuring the salary paid to employees to include various allowances, including special allowance. However, in all instances per the understanding of the PF Act, employers have only been paying contribution on Basic Salary, Dearness Allowance and Retaining Allowance or such equivalent components. The PF authorities have usually contended that ‘special allowances’ should be included for the purpose of calculation of contribution. The Hight Courts in India have taken varying views on the subject matter pertaining to contribution on allowances which had resulted in various appeals pending before the Supreme Court of India.

 

Supreme Court Decision on 28th February, 2019[1]

Various appeals[2] were preferred before the Supreme Court questioning whether various types of allowances such as special allowance, travel allowance, HRA, food allowance, etc. were to be construed as ‘basic wages’ for the purpose of calculation of contribution. The petitioners/employers had used the argument that the term ‘basic wages’ had certain specific exceptions and only such payment that had been earned by the employee in accordance with the terms of the employment was to be included for calculation of provident fund. The PF authorities, on the other hand used the principle of ‘universality’, stating that only incentive payments linked to output could be excluded from the calculation of provident fund.

 

The Hon’ble Supreme Court dismissed the appeals by the employers (except the appeal by the RPFC in the Vivekananda Vidyamandir case) and concluded, relying on the principle of universality, that all payments which were made to all employees or categories/classes of employees without discrimination and which are not specifically ‘variable’ in nature and fact or linked to certain incentive for greater output, would be construed as ‘basic wages’ and thus provident fund contribution was to be made on them. For an amount to be construed as variable in nature it would need to be demonstrated that the said amounts were payable on account of employees contributing beyond any normal work that would usually be expected of them; or that it would be payable to employees only if they availed certain opportunities.

 

The Supreme Court relied on some of its previous decisions for its conclusions, namely:

  • “Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under Section 6 of the Act. It is only such allowances not payable by all concerns or may not be earned by all employees of the concern, that would stand excluded from deduction.” [3]
  • “Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term ‘basic wages’.”[4]
  • “Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages. Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. Conversely, any payment by way of a special incentive or work is not basic wages.”[5]
  • “That the Act was a piece of beneficial social welfare legislation and must be interpreted as such.”[6]

Impact of Supreme Court Decision

The principles laid out by the Supreme Court, although not new, are a welcome clarification on the position of allowances with respect to the calculation of provident fund contribution. From an employee perspective, employees’ net take home salary is also likely to be impacted by the decision.

 

However, the possibility of the decision having a retrospective effect might exasperate employers. This is on account of the fact that the judgement interprets an existing provision in the law and does not create any new provisions. The retrospective effect may require employer to cover the shortfall in contribution for the past year but additionally pay interest and damages as well.

 

It may also be noted that the Supreme Court decision to include allowances as part of basic wages has primary financial implications in connection to those domestic employees whose salary (on which PF contributions were being paid i.e. basic salary and dearness allowance) is less than INR 15,000 per month, as well as all international workers.

 

Employers are advised to revisit their policies and salary structures and start ensuring that all components of salary which are not discretionary or variable in nature are included for the purpose of PF contributions. Employers are also recommended to conduct audits to ascertain potential past non-compliances / shortfalls in contributions.

 

The matter is also currently sub judice with the management of Surya Roshni Ltd. having filed a review petition before the Supreme Court. It also remains to be seen if the EPFO would take a more lenient stance and allow employers to rectify past non-compliances without incurring the additional cost of interest and damages.

 

References:

[1] In connection with Civil Appeal no. 6221/2011, 3965-66/2013, 3969-70/2013, 3967-68/2013 and Transfer Case no. 19/2019 (arising out of TP(C) no. 1273/2013)

[2] Appeals considered jointly: (i) The Regional Provident Fund Commissioner (“RPFC”), West Bengal v/s Vivekananda Vidyamandir and Others (Kolkata High Court); (ii) Surya Roshni Ltd. vs. Employees Provident Fund and others (Madhya Pradesh High Court); (iii) U-Flex Ltd v/s EPF and another; (iv) Montage Enterprises Pvt. Ltd. v/s EPF and another (Madhya Pradesh High Court); (v) The Management of Saint-Gobain Glass India Limited v/s The RPFC, EPFO (Madras High Court).

[3] (i) Bridge and Roof Co. (India) Ltd. vs. Union of India, (1963) 3 SCR 978

[4] Muir Mills Co. Ltd., Kanpur Vs. Its Workmen, AIR 1960 SC 985

[5] Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428

[6] The Daily Partap vs. The Regional Provident Fund Commissioner, Punjab, Haryana, Himachal Pradesh and Union Territory, Chandigarh, (1998) 8 SCC 90

Image Credits: Image by Shutterbug75 from Pixabay 

Employers are advised to revisit their policies and salary structures and start ensuring that all components of salary which are not discretionary or variable in nature are included for the purpose of PF contributions. Employers are also recommended to conduct audits to ascertain potential past non-compliances / shortfalls in contributions.

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