SC: Farmers to recover cane dues before banks

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Oct 14 2014, 07:57am hrs
In a major setback to PSU banks, the Supreme Court on Monday said farmers will get precedence over banks for the recovery of cane dues, amounting to around R5,440 crore, from sugar mills in Uttar Pradesh.

A bench headed by Chief Justice HL Dattu while rejecting the appeals of State Bank of India and Punjab National Bank observed, if you do not pay farmers, they commit suicide. Why should the farmers suffer

The banks had challenged the Allahabad High Court order that held that sugarcane farmers will have the first right over mills' sugar sales realisation, and not the lenders. The HC while disposing of a PIL filed by Rashtriya Kisan Mazdoor Sangathan convener VM Singh had directed district magistrates concerned to monitor as well as cooperate with defaulting mills in the state in offloading their sugar stocks at best possible prices and that all cane arrears be cleared by October 31. The PIL had sought a direction that farmers be paid outstanding dues for season 2013-14 immediately.

The high court also directed that where there is a tagging agreement between a mill and its lender, the bank will be entitled to 15% of the sugar sales realisation while the farmers will get 85%.

Attorney general (AG) Mukul Rohatgi and senior counsel Dhruv Mehta, appearing for the banks, argued that it would be difficult to recover the loan amount once sugar is auctioned.

They argued that the banks had granted credit facilities from time to time to sugar mills in the state and out of the total loan of R5,000 crore granted to sugar mills, the total outstanding of SBI in respect of 10 sugar companies, including Bajaj Hindusthan, Balrampur Chinni Mills, Uttam Sugars, Simbhoali Sugars, Trivani Engineering and Industry, DCM Shriram Industries, Oudh Sugar Mills, is more than R3,000 crore.

The resultant effect would be disastrous not only for the bank and mill owners but also for farmers as all accounts of sugar mills would turn NPAs, thereby compelling the banks to take recourse under the Sarfaesi Act/or under other recovery proceedings; no banks would come forward to grant any advance/loan to these sugar mills and the other mortgaged fixed assets of the companies are not sufficient to liquidate the dues of the banks, as hypothecated sugar is the primary security, the SBI stated.

Stating that it could set a bad precedent for other industries as well, the counsel said the farmer is just a supplier of raw material and not a secured creditor like a bank. So denying banks their first charge and giving precedence to raw material suppliers over banks perhaps goes against established lending norms, the AG added.

According to a statement by the private sugar mill association, during 2013-14, the sugar mills had purchased cane worth R17,366 crore from the farmers.

SBI in its appeal filed through counsel Sanjay Kapur stated that the lender had the first charge on stocks of sugar. Section 17(5) of the the UP Sugar Cane (Regulation of Supply and Purchase) Act 1953 casts an obligation on the owners/occupiers to pay the cane growers and not on the banks; the secured creditor has a primary right to sell the goods in satisfaction of the liability of the pawnor and the rights of the pawnee could not be extinguished by virtue of Section 17(5), the country's largest lender stated.

Resultantly, in view of the impugned order, the liability of payment of dues of the cane growers which was in fact fastened on the owners has now been shifted to the banks. The owners, subsequent to the impugned orders, are disposing of huge quantity of hypothecated sugar stocks and disbursing the amount to the farmers, at the cost of the banks, who are dealing with public money, the petition stated.

According to Kapur, mill owners are taking advantage of the HC order and are disposing of the sugar, which is a security of banks, in order to avoid arrest/proceeding u/s 170 of the UP Revenue Code, 2006. Thus, ultimately, the obligation which is cast on occupier is now being shifted to the banks, who are being called upon to forgo legitimate dues, in view of default of the owners, he added.