Supreme Court clarifies refund process in Super Bazar Winding Up: Writers and Publishers Pvt. Ltd. vs. Dr. AK Mishra (2020)

Introduction

Date of the Judgment: March 5, 2020
Citation: 2020 INSC 247
Judges: Dr. Dhananjaya Y Chandrachud, J and Ajay Rastogi, J

Can a bidder who fails to revive a cooperative society claim a full refund of their investment without accounting for their actions during the management period? The Supreme Court of India addressed this question in a dispute arising from the winding up of Super Bazar, a multi-state cooperative society. The court clarified the obligations of Writers and Publishers Pvt. Ltd. (WPL), the bidder entrusted with Super Bazar’s revival, regarding refunds and accountability. The judgment was delivered by a two-judge bench comprising Dr. Dhananjaya Y Chandrachud, J and Ajay Rastogi, J.

Case Background

Super Bazar, envisioned as a model cooperative in the consumer movement, faced severe financial difficulties. An inquiry under Section 78 of the Multi-State Co-operative Societies Act 2002 revealed poor management and a rising wage bill as primary causes for its losses. Consequently, on July 5, 2002, the Central Registrar of Co-operative Societies ordered the winding up of Super Bazar, a decision upheld by the Appellate Authority on November 5, 2002. The total loss of Super Bazar as of March 31, 2002, was ₹60.28 crore. The High Court of Delhi dismissed the writ petitions filed by the employees challenging the winding up order on December 19, 2003, affirming the liquidation order.

In 2005, the Supreme Court, in *Super Bazar Karamchari Dalit Sangh v. Union of India*, explored options for Super Bazar’s revival. Bids were invited, and Writers and Publishers Limited (WPL) emerged as a potential entity for revival. On February 26, 2009, the Supreme Court accepted the Evaluation Committee’s (EC) recommendation to accept WPL’s bid. The winding-up order was suspended pending revival, and the Official Liquidator (OL) and Central Registrar were directed to take necessary steps. WPL was to infuse ₹504 crore, including ₹102 crore towards share capital, ₹276 crore for working capital, and ₹126 crore for revival and revamping.

However, the revival efforts faltered. WPL failed to fully infuse the committed funds and engaged in practices that raised concerns. The Central Government pointed out that WPL had not submitted a revival plan and had outsourced shops and properties of Super Bazar to third parties. The Supreme Court, on March 29, 2016, directed that WPL should be refunded its investment with 6% interest, subject to deduction of profits made during the arrangement. The Comptroller and Auditor General of India (CAG) was tasked to verify the income, expenditure, and profits of WPL. The CAG report highlighted significant irregularities and questionable dealings by WPL during its management of Super Bazar.

Timeline:

Course of Proceedings

The initial winding-up order of Super Bazar was challenged by employees’ unions in the High Court of Delhi, which dismissed their petitions on December 19, 2003. The High Court held that the employer-employee relationship had been terminated by operation of law due to the winding-up order. This decision was further challenged in the Supreme Court under Article 136 of the Constitution in *Super Bazar Karamchari Dalit Sangh v Union of India*. The Supreme Court explored options for revival, leading to the bid by WPL.

After the failure of the revival efforts, the Supreme Court directed a refund to WPL, subject to deductions. The CAG was appointed to verify the accounts. The findings of the CAG led to a dispute over the amount to be refunded, which resulted in the present proceedings before the Supreme Court. The workmen also filed a review petition against the order dated March 29, 2016, which was dismissed on September 28, 2016, and a curative petition that was dismissed on December 15, 2016.

Legal Framework

The judgment primarily deals with the interpretation and application of the following legal provisions:

• Section 78 of the Multi-State Co-operative Societies Act 2002: This section allows for an inquiry into the working and financial conditions of a cooperative society.
• Section 86 of the Multi-State Co-operative Societies Act 2002: This section empowers the Central Registrar to direct the winding up of a multi-state cooperative society. Specifically, sub-section (1) allows for winding up after an audit, special audit, inquiry, or inspection under Sections 70, 77, 78, and 79. Sub-section 2(b) allows for winding up if the society has ceased to function according to cooperative principles.
• Section 89 of the Multi-State Co-operative Societies Act 2002: This section provides for the appointment of a liquidator upon the winding up of a society.
• Section 90 of the Multi-State Co-operative Societies Act 2002: This section outlines the powers of the liquidator, including the vesting of assets, realization of monies, determination of contributions, investigation of claims, and payment of claims. Sub-section (1) states that all assets of the society vest in the liquidator. Sub-section 2(b) empowers the liquidator to determine contributions by members. Sub-section 2(c) allows the liquidator to investigate claims and decide priorities. Sub-section 2(d) empowers the liquidator to pay claims according to their priorities.
• Rule 28 of the Multi-State Co-operative Societies Rules 2002: This rule lays down the procedure to be adopted by the liquidator.
• Rule 29 of the Multi-State Co-operative Societies Rules 2002: This rule specifies the order of priority for applying the assets of a multi-state cooperative society to pay liabilities. It prioritizes:
  • Pro-rata payment of all outside liabilities.
  • Pro-rata repayment of loans and deposits of members.
  • Pro-rata refund of share capital.
  • Pro-rata payment of dividend on the share at the rate not exceeding 6.25 per cent per annum for the period of liquidation.
• Section 25F of the Industrial Disputes Act 1947: This section deals with the conditions precedent to the retrenchment of workmen.
• Section 11 of the Employees’ Provident Funds and Miscellaneous Provisions Act 1952: This section provides for the priority of payment of contributions over other debts in cases of insolvency or winding up. Sub-section (2) states that any amount due from an employer shall be the first charge on the assets of the establishment.
• Section 7A of the Employees’ Provident Funds and Miscellaneous Provisions Act 1952: This section deals with determination of moneys due from employers.

These provisions collectively govern the winding up process of cooperative societies, the rights and obligations of stakeholders, and the priority of payments in liquidation proceedings.

Arguments

The arguments presented before the Supreme Court can be categorized as follows:

Arguments of Writers and Publishers Pvt. Ltd. (WPL)

• WPL contended that the Supreme Court’s order dated March 29, 2016, entitled them to a full refund of their investment with 6% interest, subject only to the deduction of profits. They argued that the order did not contemplate deduction of losses.
• WPL submitted that between 2009 and 2016, they invested ₹102 crore towards share capital and ₹9.34 crore towards working capital. They claimed that the total amount received by Super Bazar from WPL was ₹111.34 crore.
• WPL argued that the undisputed expenditure on Super Bazar between 2009 and 2016 was ₹54.31 crore for arrears of wages, ₹31 crore paid to workmen over three years, and ₹15 crore towards statutory dues, totaling ₹100.31 crore.
• WPL criticized the CAG’s assumption that they were not entitled to interest on share capital, stating that as shareholders, they were entitled to interest and not just dividends. They further argued that dividends are payable only if a company has earned profits.

Arguments of the Official Liquidator (OL) and the Central Government

• The OL and the Central Government supported the CAG’s report and argued that it was binding on all parties, including WPL. They contended that the refund to WPL should be in accordance with the CAG’s report and the statutory order of priorities under the Multi-State Co-operative Societies Act 2002.
• The Central Government highlighted that WPL had failed to submit a revival plan despite reminders and had outsourced Super Bazar’s shops and properties to third parties. They argued that WPL’s investment was for the revival of Super Bazar and that there was no stipulation for a refund if WPL withdrew.
• The OL argued that the amount to be refunded to WPL must be in accordance with the CAG’s report and the statutory order of priorities for the settlement of liabilities provided in the Multi-State Co-operative Societies Act 2002.

The core of the dispute was whether WPL was entitled to a full refund of its investment with interest, irrespective of its conduct during the management of Super Bazar, or whether the refund should be subject to accounting for its actions and the statutory priorities of winding-up proceedings.

Innovativeness of the argument: WPL’s argument was innovative in that it sought a literal interpretation of the Supreme Court’s order for a full refund, attempting to bypass the statutory winding-up procedures and the scrutiny of its actions during management. This was countered by the Central Government and the OL, who emphasized the need for accountability and adherence to the statutory framework.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a numbered list but the core issues that the court addressed were:

• Whether WPL was entitled to a full refund of its investment with 6% interest, subject only to the deduction of profits, as per the order dated March 29, 2016.
• Whether the CAG report was binding on WPL and all parties involved.
• Whether the statutory provisions of the Multi-State Co-operative Societies Act 2002 and the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 would override the court’s order dated March 29, 2016.
• Whether WPL should be held accountable for its actions and dealings during its management of Super Bazar.
• Whether the liquidator should consider the claim of WPL in accordance with the statutory order of priorities.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court’s judgment clarified the obligations of WPL and the importance of adhering to statutory procedures in winding-up cases. The court rejected WPL’s claim for a full refund based solely on the order of March 29, 2016, and emphasized the binding nature of the CAG report. The court also highlighted the priority of EPFO dues and the need to follow the statutory order of priorities in liquidation proceedings.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• *Super Bazar Karamchari Dalit Sangh v Union of India*: [CITATION] This case was used to provide the background of the case and the initial attempts at revival.
• *RS Mudgal v Official Liquidator*: [CITATION] This case was used to show the dismissal of the petition challenging the termination of the employees.
• Section 78 of the Multi-State Co-operative Societies Act 2002: [CITATION] The court referred to this section to show how the inquiry was conducted which led to the winding up of Super Bazar.
• Section 86 of the Multi-State Co-operative Societies Act 2002: [CITATION] The court referred to this section to show how the winding up of Super Bazar was ordered.
• Section 89 of the Multi-State Co-operative Societies Act 2002: [CITATION] The court referred to this section to show the appointment of the liquidator in the case.
• Section 90 of the Multi-State Co-operative Societies Act 2002: [CITATION] The court used this section to explain the powers of the liquidator and the process to be followed in winding up.
• Rule 28 of the Multi-State Co-operative Societies Rules 2002: [CITATION] The court referred to this rule to show the procedure to be followed by the liquidator.
• Rule 29 of the Multi-State Co-operative Societies Rules 2002: [CITATION] The court relied on this rule to emphasize the statutory order of priorities in winding-up proceedings, which WPL was trying tobypass.
• Section 25F of the Industrial Disputes Act 1947: [CITATION] The court referred to this section to show how the services of the employees were terminated.
• Section 11 of the Employees’ Provident Funds and Miscellaneous Provisions Act 1952: [CITATION] The court relied on this section to emphasize the priority of EPFO dues over other debts, including WPL’s claims.
• *Maharashtra State Cooperative Bank v Assistant Provident Fund Commissioner*: [CITATION] The court followed this precedent to hold that the dues to the EPFO had first priority over other debts.

Reasoning behind the decision

The Supreme Court’s decision was grounded in the following principles:

• Accountability: The court emphasized that WPL could not escape accountability for its actions during its management of Super Bazar. The court found that WPL had failed to fulfill its commitment to revive Super Bazar and had engaged in questionable practices.
• Statutory Compliance: The court stressed the importance of following the statutory provisions of the Multi-State Co-operative Societies Act 2002 and the Employees’ Provident Funds and Miscellaneous Provisions Act 1952. The court ruled that the statutory order of priorities for the settlement of liabilities must be followed, with the EPFO dues having first priority.
• Binding Nature of CAG Report: The court upheld the binding nature of the CAG report, emphasizing that it was appointed to verify the financial dealings of WPL. The court found no reason to deviate from the CAG’s findings.
• No Unjust Enrichment: The court sought to prevent WPL from being unjustly enriched at the expense of other stakeholders by claiming a full refund without accounting for its actions.
• Interpretation of Court Orders: The court clarified that its earlier order of March 29, 2016, was based on the assumption of a genuine revival effort by WPL, which did not materialize. The court stated that the order did not absolve WPL from accounting for its actions during management.

Final Decision and Directions

The Supreme Court delivered the following final decision and directions:

• Rejection of WPL’s Claim: The court rejected WPL’s claim for a full refund based solely on the order dated March 29, 2016. The court clarified that the refund was subject to accounting for WPL’s actions during its management of Super Bazar.
• Binding Nature of CAG Report: The court held that the CAG report was binding on all parties, including WPL.
• Statutory Priorities: The court ruled that the statutory provisions of the Multi-State Co-operative Societies Act 2002 and the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 would override the court’s earlier order.
• Accountability of WPL: The court held that WPL should be held accountable for its actions and dealings during its management of Super Bazar.
• Liquidator’s Role: The court directed the liquidator to evaluate WPL’s claim based on the CAG report and to follow statutory priorities. The liquidator was specifically instructed to treat the EPFO dues as a first priority and consider the claims of the Union government. The liquidator was also directed to consider the CAG’s observations regarding the new members inducted by WPL.
• No Interest on Share Capital: The court upheld the CAG’s view that interest on share capital is not payable when the entity has not made a profit.

Implications

The Supreme Court’s judgment in *Writers and Publishers Pvt. Ltd. vs. Dr. AK Mishra* has significant implications for similar cases involving the winding up of cooperative societies and the obligations of bidders entrusted with their revival. The key implications are:

• Accountability of Bidders: The judgment reinforces the principle that bidders entrusted with the revival of a cooperative society cannot claim a full refund of their investment without accounting for their actions during the management period. This emphasizes the need for due diligence and genuine efforts towards revival.
• Adherence to Statutory Procedures: The judgment underscores the importance of adhering to the statutory provisions of the Multi-State Co-operative Societies Act 2002 and the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 in winding-up proceedings. It clarifies that court orders cannot override statutory priorities for the settlement of liabilities.
• Binding Nature of CAG Reports: The judgment establishes that the findings of the Comptroller and Auditor General of India (CAG) are binding on all parties involved in a dispute, especially when the CAG is appointed by the court to verify financial dealings.
• Priority of EPFO Dues: The judgment reaffirms the priority of dues to the Employees’ Provident Fund Organization (EPFO) over other debts in cases of insolvency or winding up, as per Section 11 of the Employees’ Provident Funds and Miscellaneous Provisions Act 1952.
• Interpretation of Court Orders: The judgment clarifies that court orders must be interpreted in light of the facts and circumstances of the case and cannot be used to bypass statutory procedures or to unjustly enrich one party at the expense of others.
• Impact on Future Bidding Processes: The judgment serves as a cautionary tale for bidders involved in the revival of cooperative societies, highlighting the need for genuine commitment, transparency, and adherence to statutory and ethical standards.

Flowchart of Decision Making

Ratio of the Decision

Sentiment of the Judgment