Bombay High Court
Asrec (India) Ltd vs The State Of Maharashtra And 4 Others on 13 December, 2019
Equivalent citations: AIRONLINE 2019 BOM 2949
Author: Pradeep Nandrajog
Bench: Pradeep Nandrajog, Bharati Dangre
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
IN ITS ORDINARY ORIGINAL CIVIL JURISDICTION
Digitally
WRIT PETITION NO. 1039 OF 2017
signed by
Jayant D.
WITH
Jayant D. Kandarkar NOTICE OF MOTION NO. 323 OF 2017
Kandarkar Date:
2019.12.13 WITH
11:52:00
+0530
NOTICE OF MOTION NO. 342 OF 2017
WITH
CHAMBER SUMMONS NO. 80 OF 2018
IN
WRIT PETITION NO. 1039 OF 2017
ASREC (India) Limited, a Company ]
incorporated under the Companies Act, ]
1956 and registered as a Reconstruction ]
Company and Securitisation Co.with the ]
Reserve Bank of India under Section 3 ]
of The Securitisation and Reconstruction ]
of Financial Assets and Enforcement of ]
Security Interest Act, 2002 (SARFAESI ]
Act), having its registered office at the ]
address at 201/202, Building No.2 ]
Solitaire Corporate Park Chakala, ]
Mumbai-400 093 ] ... Petitioners
VERSUS
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1. The State of Maharashtra ]
Through the Office of the Govt. ]
Pleader, Public Works Deptt. ]
Building Mumbai ]
2. The Office of the Sales Tax ]
Officer (C-110), Nodal Division, ]
12, Ground Floor, F-Wing, ]
Vikrikar Bhavan, Mazgaon, ]
Mumbai-400 010 ]
3. The Official Liquidator of the ]
High Court of Bombay as the ]
Official Liquidator of M/s. Crystal ]
Mirage Pvt. Ltd. having his ]
address at 5th floor, Bank of India ]
Building, M.G.Road, Fort, ]
Mumbai-400 001 ]... Respondents
....
Mr.Rohit Gupta a/w Ms. Vinita Hambalkar a/w Ms. Sushila Vichare
i/b Arbit Law Services for Petitioner
Mr. Vinay Sonpal Special Counsel a/w Ms. Jyoti Chavan AGP for
State
....
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CORAM: PRADEEP NANDRAJOG, C.J. &
SMT. BHARATI DANGRE, J.
RESERVED ON : DECEMBER 12, 2019
PRONOUNCED ON : DECEMBER 13, 2019
JUDGMENT (PER PRADEEP NANDRAJOG, C.J.)
1. The petitioner is an assignee of the debt payable by respondent No.3 which is under liquidation. It seeks to preserve its right to proceed against the secured asset by taking recourse to SARFAESI 2002.
2. It is the case of the Petitioner that Flat No. B-2202, 22 nd floor, ad-measuring 4072 sq.ft., situated at Mahindra Eminente CHS Ltd., S.V.Road, Goregaon (West), Mumbai - 400062 ("said property") was mortgaged by respondent Nos. 4 and 5 to secure the dues payable by respondent No.3 to the predecessor in interest of the petitioner who was the assignee of the debt as per Memorandum of Equitable Mortgage created on 11th November 2011.
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3. Bank of India; the original Lender initiated proceedings under Recovery of Debt and Bankruptcy Act, 1993 which has been registered as O.A. No. 54/2014. The petitioner has been substituted as the applicant on debt being assigned.
4. The Bank resorted to proceedings under SARFAESI 2002 by issuing a notice under Sub-section (2) of Section 13 thereof on 30 th August 2013. Physical possession of the flat was taken over by the petitioner as the assignee of the debt in November 2016.
5. Respondent No.2 initiated recovery proceedings for recovery of tax dues of M/s Noble Enterprises and published an auction notice under the provisions of the Maharashtra Land Revenue Code, 1966, on 30th September 2016 which envisages recovery of tax dues against the Company by attaching the assets of its directors. Needless to record here that respondent Nos. 4 and 5 are claimed to be the directors of Noble Enterprises.
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6. It is this notice which has been challenged by the Petitioner in the present Petition.
7. The issue concerns priority of the charge.
8. During the pendency of the Petition, the Petitioner and Respondent No.2 agreed to sell the property and deposit the sale proceeds with this Court. Accordingly, the Petitioner conducted an auction and as recorded in order dated 13th June 2018, deposited the entire sale proceeds in sum of ₹ 8.02 Crore with the Prothonotary 8.02 Crore with the Prothonotary and Senior Master of this Court. The Petitioner therefore prays the amounts be released to it because outstanding dues of Crystal Mirage Pvt. Ltd. are in excess of 50 crores.
9. Since the respondents Nos. 1 & 2 rely upon the statutory charge created in favour of the Sales Tax Department under Section jdk 6 os.wp-1039.17.j.doc 37 of the Maharashtra Value Added Tax, it is the case of the petitioner that the said Section itself records that it would be subject to a Central Legislation and thus highlight that the Recovery of Debt and Bankruptcy Act 1993 ("RDB Act") is the Central Legislation and as per Section 31(B) whereof the first priority created is in favour of the secured creditor; above Government dues including revenues, taxes. It is the case of the petitioner that Section 31B of RDB Act is not restricted to the sale conducted under the provisions of RDB Act only. It will also operate in respect of the sale conducted under any other mechanism including provisions of SARFAESI 2002. Since the provision creates statutory charge in favour of a 'secured creditor', which admittedly the Petitioner is, therefore, it is immaterial whether Section 26E of SARFAESI 2002 has not been brought into force. In support of its contention, the Petitioner placed reliance on the judgments delivered by the High Court of Rajasthan; by the High Court of Madhya Pradesh in the decision reported as (2018) 55 GSTR210 (MP) Bank of Baroda Vs. jdk 7 os.wp-1039.17.j.doc Commissioner of Sales Tax, M.P., Indore & Anr. and by the High Court of Gujarat in Special Civil Application No. 17891 of 2018 Kalupur Commercial Co-operative Bank Ltd. Vs. State of Gujarat & the Full Bench Decision of the Madras High Court reported as AIR 2017 Madras 67, the Assistant Commissioner Vs. Indian Overseas Bank & Ors.
10. It is the case of Respondent Nos. 1 and 2 that Section 26E of SARFAESI 2002 has not been brought into force till date and notwithstanding Section 31B of RDB Act 1993 being in force, for purposes of action under SARFAESI 2002, the charge created by Section 37 of Maharashtra Value Added Tax 2002 shall prevail.
11. In order to appreciate the dispute between the parties, it is essential to note Section 37 MVAT Act, 2002 . It reads:
"37. Liability under this Act to be the first charge: -
Notwithstanding anything contained in any contract to the contrary but subject to any provision regarding creation of first charge in any Central Act for the same time being in force, any jdk 8 os.wp-1039.17.j.doc amount of tax, penalty, interest, sum forfeited, fine or any other sum, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person.
[(2)(2) The first charge as mentioned in sub- section (1) shall be deemed to have been created on the expiry of the period specified in sub- section (4) of the section 32, for the payment of tax, penalty, interest, sum forfeited, fine or any other amount."
12. A perusal of Section 37 of MVAT Act, 2002 reveals that though it commences with a non-obstante clause, but it recognizes that the same shall be subject to any provision regarding creation of the first charge in any Central Act. Therefore, if, by virtue of any provision under a Central Act, any priority or charge is created in favour of any party the same shall prevail.
13. The claim of the Petitioner is based on Section 31B of RDB Act, 1993 which reads as follows -
"31B. Notwithstanding anything contained in any other law for the time being in force, the rights of jdk 9 os.wp-1039.17.j.doc secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority."
14. Section 31B in RDB Act 1993 was introduced by an Amendment in the year 2016 and was brought into force on 2 nd September 2016. The non-obstante clause in the Section thus overrides any other law for the time being in force. The Section accords priority No.1 to secured creditors with respect to the secured assets.
15. This issue came up before the Rajasthan High Court in the matter of G.M.G Engineers & Contractor Pvt. Ltd.. The Court, after taking into consideration, the provisions of Section 47 of VAT Act in Rajasthan as well as Section 31B of RDB Act, held as follow: -
"We are yet considering the effect of the amended provision. The Apex Court has made analysis of a provision of first charge vis a vis secured creditor jdk 10 os.wp-1039.17.j.doc in the case of Central Bank of India (supra). The first charge was given supremacy than rights under mortgagee or to a secured creditor. The distinction between "first charge and secured creditor" is necessary to analyse scope of Section 26E of the Act of 2002 and Section 31B of the Act of 1993. The amended provisions are having overriding effect and give priority to the secured creditors vis a vis State dues. It does not, however, nullify the effect of first charge created on the property under the State Act. If intention of Parliament would have been to nullify the effect of first charge, the language of Section 26E of the Act of 2002 and Section 31B of the Act of 1993 would have been different as indicated by the Apex Court in the case of Central Bank of India (supra). It should have been with non-obstante clause and that secured creditors would have priority over the first charge created under a State legislation. The amendment made by Parliament is to give priority to the secured creditors vis a vis State dues without speaking about the first charge"
16. Dealing with a pari materia provision in the Value Added Tax Act in Madhya Pradesh, in Bank of Baroda Case (Supra), the Madhya Pradesh High Court held as under:-
"8. In the present case, undisputedly a notice of sale by the respondent/ Commercial Department has been issued on 19.07.2017. The Amendment Act, jdk 11 os.wp-1039.17.j.doc 2016, which incorporates Section 31B reads as under: -
"31B Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority.
Explanation.- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
9. Thus, the aforesaid statutory provisions makes it very clear that the dues of the banks are to be recovered at the first instance. Section 33 of the MP VAT Act, 2002 reads as under: -
"33: Tax to be first charge (1) Notwithstanding anything to the contrary, contained in any law for the time being in jdk 12 os.wp-1039.17.j.doc force and subject to the provisions of section 350 of the Companies Act, 1956 (No.1 of 1956), any amount of tax and/ or penalty or interest, if any, payable by a dealer or other person under this Act shall be first charge on the property of the dealer or such person.
(2) Notwithstanding anything contained in this Act, where a dealer or person is in default or is deemed to be in default under clause (a) of subsection (11) of section 24 and whose property is being sold by a bank or financial institution for recovery of its loan, the Commissioner may forgo the right of first charge as mentioned in subsection (1) against the property sold on the following conditions: -
(a) if the arrears of tax, penalty, interest or part thereof or any other amounts is up to 25 percent of the total auction value, the arrears shall be paid in full by the bank of financial institution;
(b) if the arrears of tax, penalty, interest or part thereof or any other amounts is more than 15 percent of the total auction value, the 25 percent of the total auction value and the amount value as the remaining arrears bear to the total dues of the bank or financial institution, shall be paid by the bank or financial institution."
jdk 13 os.wp-1039.17.j.doc In our considered opinion, the Enforcement of Security Interest and Recovery of Debts and Loans and Miscellaneous Provision (Amendment) Act, 2016 came into force w.e.f. 01.09.2016 and by virtue of the said amendment, the right of the secured creditors to realise the secured dues and debt due, which are payable to the secured creditors by sale of assets over which security has been created, shall have priority over all other debts and government dues in including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authorities.
Not only this, it also has an overriding effect over all other enactments including the provisions the provisions of MP VAT Act, Central Sales Tax Act, Entry Tax Act and any other Tax Act. Though, an attempt has been made to demonstrate before this Court that the amendment will not dis-entitle to recover the dues by them as the dues are outstanding since 2012, nothing prevented the State Government to recover the dues since 2012 and the State Government woke up from slumber only after the amendment came into force and by virtue of the amendment in the Central Act, this Court is of the considered opinion that by no stretch of imagination, the State Government can be permitted to auction the property in question as Bank of Baroda has priority charge over the said property in light of the amendment which has been quoted above."
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17. Considering a pari materia provision in the Value Added Tax Act in the State of Tamil Nadu, in Indian Overseas Bank Case (supra) the Full Bench of the Madras High Court took a similar view.
18. Considering another pari materia provision in the Gujarat Value Added Tax 2003, in Kalupur Commercial Co.operative Bank Ltd. (Supra), a Division Bench of the Gujarat High Court held as under:
"35. While it is true that the Bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31 B of the RDB Act being a substantive provision giving priority to the "secured creditors", the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(la) of the RDB Act defines the phrase "secured creditors" to have the same meaning as assigned to it under the SARFAESI Act. Moreover, Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to, and not in derogation of inter-alia the RDB Act. As such, the SARFAESI Act was enacted only with the jdk 15 os.wp-1039.17.j.doc intention of allowing faster recovery of debts to the secured creditors without intervention of the court. This is apparent from the Statement of Objects and Reasons of the SARFAESI Act. Thus, an interpretation that, while secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.
36. The insertion of Section 31B of the RDB Act will give priority to the secured creditors even over the subsisting charges under the other laws on the date of the implementation of the new provision i.e. 1.9.2016 .The Supreme Court ,in the cases of State of Madhya Pradesh v. State Bank of Indore ,(2001) 126 STC1(SC), has held that a provision creating first charge over the property would operate over all charges that may be in force. The following observations made in para 5 of the said judgment are relevant:
"5.Section 33-C creates a statutory charge that prevails over any charge that may be in existence. Therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the bank in respect of the loan taken by the second respondent .There is no question of retrospectivity here,as on the date when it was introduced, section 33-C operated in respect jdk 16 os.wp-1039.17.j.doc of all charge that where then in force and gave sales tax dues precedence over them ...."
19. We respectfully agree with the consistent view taken by three Division Benches of three High Courts and the view taken by the Full Bench of the fourth High Court.
20. The only contention which needs to be noted which was made by learned counsel for Respondent Nos. 1 and 2 which was not made before the four learned Benches of the four High Courts in their opinions above noted, is that Chapter IVA which was inserted in SARFAESI 2002 comprising Sections 26B to 26E warrants a record to be made in the Central Register by the Central Registry creating a security interest. As per learned Counsel as per Sub- section (2) of Section 26B which is a part of Chapter IVA a secured creditor has to ensure that the security interest is recorded in the record of the Central Registry. The argument therefore was that unless this is done, the priority of interest contemplated by Section 26E would not be applicable.
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21. The argument is without any substance because the law declared in the four opinions above referred to is that if any Central Statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the Value Added Tax of the State. But we note the fact that the security interest has been entered in the record of the Central Registry.
22. The Writ Petition is accordingly allowed. The Rule is made absolute. The Notice dated 30th September 2016 is quashed.
23. The sale proceeds realized are directed to be released to the petitioners by the Prothonotary & Senior Master of this Court together with such interest which has accrued thereon.
24. Costs made easy.
25. Pending applications are disposed of as infructous.
SMT. BHARATI DANGRE, J. CHIEF JUSTICE