Gujarat High Court
State Bank Of India vs State Of Gujarat on 20 January, 2023
Author: Sonia Gokani
Bench: Sonia Gokani
NEUTRAL CITATION
C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 18302 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MS. JUSTICE SONIA GOKANI Sd/-
and
HONOURABLE MR. JUSTICE SANDEEP N. BHATT Sd/-
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1 Whether Reporters of Local Papers may be allowed Yes
to see the judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy No
of the judgment ?
4 Whether this case involves a substantial question No
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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STATE BANK OF INDIA
Versus
STATE OF GUJARAT
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Appearance:
MS DHARMISHTA RAVAL(707) for the Petitioner(s) No. 1,2
MR TRUPESH KATHIRIYA, AGP for the Respondent(s) No. 1,2 - State
NOTICE ISSUED BY PUBLICATION for the Respondent(s) No. 3 -
Purchaser - Private Party
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CORAM:HONOURABLE MS. JUSTICE SONIA GOKANI
and
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
Date : 20/01/2023
ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE SANDEEP N. BHATT) Page 1 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined
1. The petitioners are before this Court challenging the action of respondent No.2 in executing the Sale Deed No.10447 of 2018 dated 04.09.2018 in favour of respondent No.3, who is the purchaser of the property i.e. non-
agriculture land situated at Mouje : Moraiya, Taluka and District : Ahmedabad, Sub-District : Sanand, Survey No.396 Paiki 1, Sub-Plot No.66 admeasuring about 2600 sq.mtrs., together with the construction standing thereon, belonging to M/s. Atrium Infocomm Private Limited - the original borrower, and further to direct the respondents No.1 and 2 -
State Tax Authorities to transfer the amount of Rs.1,74,00,000/- to the petitioners recoverable towards sale of the property in question, with interest, and further to restrain respondent No.3 - purchaser from depleting, transferring, encumbering, alienating or in any way dealing with the property in question.
2. This Court has, on 18.01.2023, after hearing the learned advocates for the respective parties at length, passed the following order.
"1. The petitioner No.1 is a State Bank of India, which has approached this Court under Article 226 of the Constitution of India challenging the action of the respondent No.2 in executing the sale deed dated 04.09.2018 in favour of the respondent No.3, who is the purchaser of the property sold by the respondent in alleged violation of Page 2 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined the principle of Recovery of Debt Due to Bank and Financial Institutions Act, 1993 and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('the SARFAESI Act' hereinafter).
2. The property in question is the non-agricultural land being Sub-plot No.66 admeasuring about 2600 Sq. Mts together with the construction standing in survey No.396 paiki 1 situated at Mouje:Moraiya, Taluka and District Ahmedabad, Sub-district Sanand belonging to M/s.Atrium Infocomm Private Limited.
3. M/s.Atrium Infocomm Private Limited had approached the petitioner-Bank for the purpose of obtaining Banking facilities including the cash credit facilities which had been sanctioned, subject to certain terms and conditions, one of them was that the immovable properties was to remain under the pari passu charge of the petitioner. The cash credit exposure was to be enhanced to the tune of Rs.97.20 Crore, which was permitted by creating an equitable mortgage by way of Deposition of Title Deeds. The said charge created on the said property by way of Equitable Mortgage has been registered before the Sub- Registrar, Ahmedabad on 07.12.2012.
4. The company since failed to repay the dues of the Bank as per the agreed terms, it was classified as Non- Performing Asset by petitioner No.1 on 27.09.2013. The petitioner Bank issued the demand notice under Section 13(2) of the SARFAESI Act read with Rule 3 of the Security Interest (Enforcement) Rules, 2002 on 18.10.2013 for repayment of the amount of Rs.99.13 Crore. As the company failed to repay on 04.10.2016, the possession notice was served upon the company and an advertisement was published on 09.10.2016 in the 'Times of India' and 'Divya Bhaskar' informing to the public at large that the petitioner No.1 has taken the symbolic possession of the Page 3 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined property.
5. The petitioner No.1 along with the Vijiya Bank filed an Original Application being Original Application No.435 of 2014 before the Debt Recovery Tribunal-I, at Ahmedabad ('the DRT' hereinafter) on 29.09.2014 under the provisions of the Recovery of Debt Due to banks and Financial Institutions Act, 1993 for recovery of Rs.116.09 Crores against the Company. The DRT vide its order dated 31.07.2018 allowed the Original Application NO.435 of 2014 and the right of the petitioners to recover the monies due from the company as well as the right to sell the property and recover the unpaid sum and thus, the right to sell the property has been recognized in the order of the DRT. There was an injunction restraining to transfer, encumber or alienate the property/asset without paying the claim of the Bank, the said order was confirmed.
6. The petitioner No.1 on 29.09.2018 has brought to the notice of the Sales Tax Department that the properties, which the Sales Tax Department is proposing to sell are under equitable mortgage of the petitioner. It also cautioned the respondent Nos.1 and 2 not to dispose of and sell the properties which are under the symbolic possession of the petitioners. However, it is the grievance of the petitioners that immediately on the publication of the e-auction notice came to the knowledge of the petitioner that the property had already been sold by the respondent No.2 on 04.09.2018 by way of a registered sale deed executed in favour of the respondent No.3 by respondent No.2.
7. It is also the additional grievance that the property was sold way below the market price and the auction notice published by the Bank. This having been done in alleged violation of Recovery of Debt Due to Bank and Financial Institutions Act, 1993 and SARFAESI Act, the respondent No.3 filed an objection against the sale of the said property pursuant to the auction notice published by the Recovery Page 4 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined Officer in Recovery Proceeding No.468 of 2018. Objections were disposed of granting liberty to the petitioners to initiate the recovery proceedings.
8. The petitioner No.1's counsel sent a legal notice to cancel the sale deed and to make payment of Rs.1.74 Crore to the petitioner. The reply has been given on 30.08.2019 justifying the action of the respondent and hence, this has aggrieved the petitioner, who is before this Court seeking following reliefs:
"12...
A. YOUR LORDSHIPS may be pleased to issue an appropriate writ in the nature of Certiorari any other appropriate writ, order or direction, quashing and setting aside the sale deed dated 04.09.2018 in favour of Respondent No.3, and annexed at Annexure-A to the Petition;
B. YOUR LORDSHIPS may be pleased to issue a writ of mandamus or any other appropriate writ, order or directions holding and declaring that the Petitioners have exclusive first charge over the monies realized pursuant to the sale of assets of M/s.Antirum Infocom Private Limited under the Provisions of RDDB Act and the SARFAESI Act;
C. YOUR LORDSHIPS may be pleased to issue a writ of mandamus or any other appropriate writ, order or directions directing the Respondent Nos.1 and 2 to transfer the amount of Rs.1,74,00,000/- to the Petitioner recoverable towards sale of all that piece or parcel of non-agriculture land for industrial purpose bearing Sub-Plot No.66, admeasuring about 2600 Sq. Mts., together with construction standing or to be carried out thereon, situated on the land bearing Survey No.396 paiki 1 paiki situated lying and being at Mouje:Moraiya, Taluka and registration District Ahmedabad and Sub District Sanand;Page 5 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023
NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined D. YOUR LORDSHIPS may be pleased to issue a writ of mandamus or any other appropriate writ, order or directions directing the Respondent Nos.1 and 2 to transfer the amount along with interest at the rate of 6% to the Petitioner appropriate towards sales of all that piece or parcel of non-agriculture land for industrial purpose bearing Sub-Plot No.66, admeasuring about 2600 Sq. Mts., together with construction standing or to be carried out thereon, situated on the land bearing Survey No.396 paiki 1 Paiki situated lying and being at Mouje:Moraiya, Taluka and Registration District Ahmedabad and Sub District: Sanand;
E. That pending admission, hearing and final disposal of this Petition:
i) YOUR LORDSHIPS may be pleased to issue appropriate directions directing the Respondent No.1 and 2 to deposit the amount with the Petitioner Bank appropriated towards sale of all that piece or parcel of non-agriculture land for industrial purpose bearing Sub-Plot No.66, admeasuring about 2600 Sq. Mts., together with construction standing or to be carried out thereon, situated on the land bearing Survey No.396 paiki 1 paiki situated lying and being at Mouje:Moraiya, Taluka and Registration District Ahmedabad and Sub District Sanand;
ii) YOUR LORDSHIPS may be pleased to pass an order restraining Respondent NO.3 from depleting, transferring encumbering, alienating or in any way dealing with the property.
F. YOUR LORDSHIPS may be pleased to grant such other and further reliefs and/or orders in the interest of justice in favour of the Petitioners as deemed just and proper."
Page 6 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined
9. We have heard the learned advocate, Ms.Dharmistha Raval appearing for the petitioners, who has also relied on the decision of this Court in case of Kalupur Commercial Co-operative Bank Ltd. vs. State of Gujarat and also the decision of the Bank of Baroda vs. State of Gujarat in Special Civil Application No.3025 of 2021.
10.1 She has also drawn the attention of this Court to Section 31B of the Recovery of Debt Due to Bank and Financial Institutions Act, 1993 to urge that the Bank would have a priority for being a secured creditor. The Title Deeds were deposited by way of a mortgage and entire proceedings were in favour of the petitioner-Bank. She has also further submitted that the company has gone into liquidation and proceedings are pending under the IB Code. However, she will need to check that the Petition No.181 of 2019 i.e. under the IB Code whether is still pending. She has also, on instructions, submitted that for the purpose of procedurally being right the Bank does not mind going to the Civil Court for getting the Sale Deed set aside, but, this Court shall need to direct the respondent-authority to handover the amount of consideration fetched by the sale since the same is in complete violation of the existing provision of law.
10.2 By pointing out at the chronological events, she has urged that at every stage the Bank has been vigilant and has done what was needed to be done under the Act.
11. We have heard the learned AGP, Mr.Trupesh Karathiya, who has taken the serious objections on the maintainability of this petition and according to him, it will be the Civil Court which shall decide this issue as setting aside of the registered sale deed should not be permitted at this stage in the writ jurisdiction. He has also further urged that the amount is secured with the State and therefore, there should be no requirement for the amount to be handed-over the the Bank. Moreover, this is all before the Page 7 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined Section 26E has come on the statute Book and therefore, the priority claimed by the Bank will have no bearing. The dues of the State were needed to be fulfilled for which the property has been already sold.
12. This Court would require presently the detail of initiation of proceedings under the IB Code against the company, whose property sold by the Bank on the consideration of which the Bank is insisting for the Title Deeds having been mortgaged way back in December 2012. Learned advocate, Ms. Raval ensures to get those details by 20.01.2023 and therefore, for that limited purpose the matter is adjourned to 20.01.2023. To be listed at the top of the board."
3. In view of above, Ms. Raval, learned advocate for the petitioners has submitted the details. She has relied upon the decision of this Court recorded on Special Civil Application No.3025 of 2021 dated 27.10.2021 in the case of Bank of Baroda versus State of Gujarat and has submitted that this petition may be allowed by cancelling the sale deed executed by and between the respondents - Tax Authorities and the purchaser and direct the respondents - Tax Authorities to transfer the entire amount received from the said sale transaction of the property in question in favour of the petitioners.
4. Learned AGP Mr.Kathiriya for the State Authorities has submitted that the Authorities have rightly executed the sale deed as there was a huge dues pending Page 8 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined qua them. He has submitted that the respondents - Tax Authorities may not be left with the huge dues. He has submitted that this petition may be rejected.
5. Rule. Learned AGP waives service of notice of rule on behalf of the State. Though served, none appeared for respondent No.3 - private party - purchaser.
6. The issue involved in this petition is as to whether the dues of secured financial institution will have priority over State tax dues or not and if yes, then the amount of sale transaction shall have to be transferred to the financial institution by the State Authorities or not.
7. At this stage, it would be refer to the provisions of Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which reads as under :
" 26E. Priority to secured creditors. -- Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or 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 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of Page 9 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.] "
8. Further, the decision of this Court in the case of Kalupur Commercial Cooperative Bank Ltd., versus State of Gujarat - Special Civil Application No.17891 of 2018 dated 23.09.2019 is very clear about the issue on hand. Relevant paragraphs 9 to 14, 27, 29 to 35 and 48 to 55 are referred as under :
"9. The Value Added Tax Act, 2003, came into force from 1st April 2006 in the State of Gujarat. The Act was enacted to consolidate and amend the laws relating to the levy and collection of tax on the value added basis in respect of the sale of goods in the State of Gujarat. Section 48 of the Act, 2003, is with regard to the charge on the property. Section 48 reads as under :
"48. Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case may be, such person."
10, Section 46 of the VAT Act is with regard to the special powers of the tax authorities for recovery of tax as arrears of land revenue. Section 46 of the VAT Act reads as under :
"46. Special powers of tax authorities for recovery of tax as arrears of land revenue.Page 10 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023
NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined (1) For the purposes of effecting recovery of the amount of tax, penalty or interest due from any dealer or other person by or under the provisions of this Act or under any earlier law, as arrears of land revenue. -
(i) The Commissioner, the special Commissioner, Additional Commissioner and the joint Commissioners shall have and exercise all the powers and perform all the duties of the Collector under the Bombay Land Revenue Code, 1879.
(ii) The Deputy Commissioners and Assistant Commissioner shall have and exercise all the powers (except the powers of arrest and confinement of a defaulter in a civil jail) and perform all the duties the assistant Collector or Deputy Collector under the said Code.
(iii) The Commercial Tax Officers shall have and exercise all the powers (except the powers of arrest and confinement of a defaulter in a civil jail) and perform all the duties of the Mamlatdar under the said Code.
(2) Every order passed in exercise of the powers conferred buy sub-section (1) shall, for the purpose of section 73, 75, 79, or 94, be deemed to be an order passed under this Act."
11. Sections 31B and 34 of the Recovery of Debts and Bankruptcy Act, 1993, read as under :
"31B. Priority to secured creditors.- 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 Page 11 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined 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 (31 of 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."
"34. Act to have over-riding effect.-
(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984) [the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries Development Bank of India Act, 1989 (39 of 1989)."
12. Sections 26E, 35 and 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Page 12 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined Security Interest Act, 2002, read as under :
"26-E. Priority to secured creditors.- Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or 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 (31 of 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."
"35. The provisions of this Act to override other laws-The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."
"37. Application of other laws not barred.-The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force."
13. The statement of objects and reasons for the two Page 13 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined enactments read as under:
"THE SECURITISATION AND
RECONSTRUCTION OF FINANCIAL ASSETS
AND ENFORCEMENT OF SECURITY INTEREST
ACT, 2002
(Act No.54 of 2002)
STATEMENT OF OBJECTS AND
REASONS
The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of nonperforming assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Page 14 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable the banks and financial institutions to realize long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.
It is now proposed to replace the Ordinance by a Bill, which, inter alia, contains provisions of the Ordinance to provide for -
(a) Registration and regulation of securitisation companies or reconstruction companies by the Reserve Bank of India;
(b) facilitating securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities;
(c) Facilitating easy transferability of financial assets by the securitisation company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture;
(d) Empowering securitisation companies or reconstruction companies to raise funds by issue of security receipts to qualified institutional buyers;
(e) Facilitating reconstruction of financial assets acquired by exercising powers of enforcement of Page 15 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions;
(f) Declaration of any securitisation company or reconstruction company registered with the Reserve Bank of India as a public financial institution for the purpose of section 4A of the Companies Act, 1956;
(g) Defining 'security interest' as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution;
(h) Empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or takeover management in the event of default, i.e., classification of the borrower's account as non-
performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time;
(i) The rights of a secured creditor to be exercised by one or more of its officers authorized in this behalf in accordance with the rules made by the Central Government;
(j) An appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal;
(k) Setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to securitisation, asset reconstruction and creation of security interest;
Page 16 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined
(l) Application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities;
(m) Non-application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases where eighty per cent, of the loans are repaid by the borrower. The Bill seeks to achieve the above objects."
14. We may also quote the statement of objects and reasons specified in The Recovery of Debts Due to Banks & Financial Institutions Act, 1993 The same read thus;
" THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 STATEMENT OF OBJECTS AND REASONS Banks and financial institutions at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to the banks and financial institutions has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time. The Committee on the Financial System headed by Shri M. Narasimham has considered the setting up of the Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms.Page 17 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023
NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined An urgent need was, therefore, felt to work out a suitable mechanism through which the dues to the banks and financial institutions could be realized without delay. In 1981, a Committee under the Chairmanship of Shri T. Tiwari had examined the legal and other difficulties faced by the banks and financial institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary procedure. The setting up of Special Tribunals will not only fulfill a longfelt need, but also will be an important step in the implementation of the Report of Narasimham Committee. Whereas on 30th September, 1990 more than fifteen lakhs of cases filed by the public sector banks and about 304 cases filed by the financial institutions were pending in various courts, recovery of debts involved more than Rs.5622 crores in dues of Public Sector Banks and about Rs.391 crores of dues of the financial institutions. The locking up of such huge amount of public money in litigation prevents proper utilization and recycling of the funds for the development of the country. The Bill seeks to provide for the establishment of Tribunal and Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. Notes on clauses explain in detail the provisions of the Bill.
ACT 51 OF 1993 The Recovery of Debts Due to Banks and Financial Institutions Bill having been passed by both the Houses of Parliament received the assent of the President on 27th August 1993. It came on Page 18 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined the Statute Book as THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 (51 of 1993):)"
27. The principles discernible from the decision of the Supreme Court in the case of Kumaon Motor Owners' Union Ltd. (supra) are that, if there is a conflict between the provisions of the two Acts and if there is nothing repugnant, the provisions in the later Act would prevail. The second principle discernible is that, while resolving the conflict, the court must look into the object behind the two statutes. To put it in other words, what necessitated the legislature to enact a particular provision, later in point of time, which may be in conflict with the provisions of the other Acts. The third principle discernible is that the court must look into the language of the provisions. If the language of a particular provision is found to be more emphatic, the same would be indicative of the intention of the legislature that the Act shall prevail over the other statutes.
29. The principles of law discernible from the decision of the Supreme Court in the case of Solidaire India Ltd. (supra) are that, if there is a conflict between the two special Acts, the later Act must prevail. To put it in other words, when there are two special statutes which contain the non-obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the legislature could be said to be aware of the earlier legislation and its non-obstante clause. If the legislature still confers the later enactment with a non- obstante clause, it means that the legislature wanted that enactment to prevail.
30. We are conscious of the fact that in the case on hand there is no conflict between two special statutes enacted by the Parliament. The conflict is with the State Act and the Central Act. We are trying to understand the Page 19 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined true purport and effect of Section 26E of the SARFAESI Act which came to be enacted later in point of time and also the effect of Section 31B of the RDB Act which came to be enacted later in point of time. In other words, what necessitated the introduction of the two provisions in the two enactments and what object the two provisions would subserve.
31. We may, at the outset, clarify that the Government of India, Ministry of Finance, notified the provisions of Section 26(E) on 1st September 2016. The copy of the Notification issued by the Government of India, published in the Official Gazette Part-II, Section 3, at Serial No.2142 dated 1st September 2016 has been placed on record. The Notification reads as under :
"MINISTRY OF FINANCE (Department of Financial Services) NOTIFICATION New Delhi, the 1st September, 2016 S.O. 2831 (E).--In exercise of the powers conferred by sub-section (2) of section 1 of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016), the Central Government hereby appoints the 1st day of September, 2016 as the date on which the following provisions of the said Act shall come into force, namely :-
Sr. No. Sections 1 Sections 2 and 3 (both inclusive); 2 Sections 4 [except clause (xiii)]; 3 Section 5 and 6 (both inclusive);
4 Sections 8 to 16 (both inclusive); 5 Sections 22 to 31 (both inclusive); 6 Sections 33 to 44 (both inclusive).Page 20 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023
NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined [F.No. 3/5/2016 DRT] ANANDRAO VISHNU PATIL, Jt. Secy."
32. Section 31B has been inserted in the Recovery of Debts and Bankruptcy Act, 1993 (herein after referred to as "the RDB Act") by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1.9.2016, which contains a non-obsante clause and which expressly provides that the secured debts shall be paid in priority over all other debts and Government dues including the State taxes.
33. Apart from the fact that Section 31B of the RDB Act is a later enactment, the language of the said provision also clearly indicates the intention of the Parliament to give precedence even over the Government dues notwithstanding anything to the contrary in any other law.
34. We are sure of one thing that there exists no repugnancy in the two legislations. The intention of the Parliament could not be said to nullify the State enactment providing the first charge on the property. The legislations have been made by the Central Government and the State respectively under Entries I and II of the Schedule and not of the Concurrent List. The amendment made by the Parliament is to give priority to the secured creditors vis-a-vis the State dues without speaking about the first charge. This aspect was duly considered by the Supreme Court in the case of Central Bank of India (supra). The amended provision, i.e. Section 26E of the SARFAESI Act and Section 31B of the RDB Act, would have been different as indicated by the Apex Court in the case of Central Bank of India (supra).
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 31B 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 Page 21 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined 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 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 the 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.
48. In the case of Stock Exchange, Bombay v. V.S.Kandalgaonkar, reported in (2014)51 taxmann.com 246 (SC), it was held by the Bombay High Court that, "By virtue of lien on securities under rule 43 of Bombay Stock Exchange Rules, BSE being secured creditor of defaulting member would have priority over dues of Income - tax department." While dealing with the tax recovery under Section 226 of the Incometax Act, 1961, read with Sections 8 and 9 of the Securities Contracts (Regulation) Act, 1956, it was held by the Apex Court that collection and recovery of tax has to be based on proper appreciation of facts of the case. While deciding Other modes of recovery (Priority over debts), the Apex Court duly considered the power of Central Government to direct rules to be made or to make rules and observed that a membership card is only a personal permission from Stock Exchange to exercise rights and privileges that may be given subject to Rules, Bye-Laws and Regulations of Exchange and moment a member is declared a defaulter, his right of nomination shall cease and vest in Exchange because even personal privilege given is at that point taken away from defaulting member. It therefore held that by virtue of rule 43 of Bombay Stock Exchange Rules security provided by a Page 22 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined member shall be a first and paramount lien for any sum due to Stock Exchange. Thus, Bombay Stock Exchange being secured creditor would have priority over Govt. dues and if a member of BSE was declared a defaulter, Income-tax department would not have priority over all debts owned by defaulter member. The first thing to be noticed is that the Income Tax Act does not provide for any paramountancy of dues by way of income tax. This is why the Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2005] 5 SCC 694 (para 19) held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles v. Grover (1832) (131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods. In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad v. Central Bank of India [1967] 3 SCR 855 after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore "law in force" in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861,
862). In the present case, as has been noted above, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues.
49. The two decisions referred to above, one of the Supreme Court and another of the Bombay High Court, as such may not be helpful to the Bank because the principal Page 23 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined issue in the case on hand is with regard to the statutory charge which is created by the State enactment. The Bombay High Court was dealing with a matter under the Income Tax Act and under the Income Tax Act, there is no provision analogous to Section 48 of the VAT Act which creates a statutory charge.
50. There is one another important argument of Mr. Sheth which is quite appealing and we are at one with Mr. Sheth on the same. Indisputably, the Bank put forward its claim over the secured assets of the Bank for the first time on 01.10.2016 and that too by way of provisional attachment of the properties under Section 45 of the VAT Act, keeping in mind the dues that may be determined in future. It is not in dispute that there were no crystallized dues as on 01.10.2016 and, therefore, there was no question of there being any charge under Section 48 of the VAT Act which could only be in respect of the actual dues. It is also not in dispute that prior to the dues being crystallized in the case of the defaulting dealer, the Bank had already taken over the possession of the properties of the dealer, and by that time, Section 31B of the RDB Act had already been enforced by the Central Government. It is preposterous to suggest that the charge over the property under Section 48 of the State Act would come into force from the assessment of the earlier financial years and what is relevant in the present case is that the dues and resultantly the charge under Section 48 of the VAT Act came into existence after the implementation of Section 31B of the RDB Act.
51. Section 48 of the VAT Act would come into play only when the liability is finally assessed and the amount becomes due and payable. It is only thereafter if there is any charge, the same would operate. The authority under the VAT Act passed the assessment order later in point of time.
52. The language of Section 48 of the VAT Act is plain and simple and the phrase 'any amount payable by a dealer or any other person on account of tax, interest or penalty' therein assumes significance. The amount could be said to be payable Page 24 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined by a dealer on account of tax, interest or penalty once the same is assessed in the assessment proceedings and the amount is determined accordingly by the authority concerned. Without any assessment proceedings, the amount cannot be determined, and if the amount is yet to be determined, then prior to such determination there cannot be any application of Section 48 of the VAT Act. We may also refer to Section 47 of the VAT Act. Section 47 of the VAT Act is with respect to transfer of property by the dealer to defraud the Revenue. According to Section 47, if a dealer creates a charge over his property by way of sale, mortgage, exchange or any other mode of transfer after the tax has become due, then such transfer would be a void transfer. The reason why we are referring to Section 47 is that the phrase therein 'after any tax has become due from him' assumes significance. The same is suggestive of the fact that before the assessment proceedings, or, to put it in other words, before a particular amount is determined and becomes due to be payable if there is any transfer of property of the dealer, such transfer would not be a void transfer. Therefore, the condition precedent is that the tax should become due and such tax which has become due shall be payable by a dealer. Once this part is over, then Section 48 of the VAT Act would come into play.
53. One of us, J.B. Pardiwala, J., sitting as a Single Judge, had the occasion to consider this issue in the case of Bank of Baroda, Through its Assistant General Manager Prem Narayan Sharma vs. State of Gujarat & Ors., Special Civil Application No.12995 of 2018, decided on 16.09.2019. We may quote the relevant observations made in the said judgment.
"It is preposterous to suggest in the case on hand that as the assessment year was 2012-13, Section 48 could be said to apply from 2012-13 itself. Even in the absence of Section 26E of the SARFAESI Act or Section 31B of the RDB Act, Section 48 of the VAT Act would come into play only after the determination of the tax, interest or penalty liable to Page 25 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined be paid to the Government. Only thereafter it could be said that the Government shall have the first charge on the property of the dealer."
54. In view of the aforesaid discussion, We have no hesitation in coming to the conclusion that the first priority over the secured assets shall be of the Bank and not of the State Government by virtue of Section 48 of the VAT Act, 2003.
55. In the result, this writ application succeeds and is hereby allowed. The impugned attachment notice dated 22.01.2018 (Annexure-A) and the impugned communication dated 19.04.2018 (Annexure-B) issued by the respondent No.2 is hereby quashed and set aside. It is hereby declared that the Bank has the first charge over the properties mortgaged from M/s. M. M. Traders by virtue of Section 26E of the SARFAESI Act."
9. For more clarity, it would be fruitful to further refer to the decision of Hon'ble Apex Court in the case of Kotak Mahindra Bank Limited versus Girnar Corrugators Pvt. Ltd., reported in 2023 (1) SCALE 456, more particularly paragraph 9 thereof, which reads as under :
"9. At this stage, the object and purpose of the enactment of SARFAESI Act is required to be considered. SARFAESI Act has been enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central debts of security interest created on property rights, and for matters connected therewith or incidental thereto. Therefore, SARFAESI Act has been enacted providing specific mechanism / provision for the financial assets and security interest. It is a Page 26 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined special legislation for enforcement of security interest which is created in favour of the secured creditor - financial institution. Therefore, in absence of any specific provision for priority of the dues under MSMED Act, if the submission on behalf of respondent No.1 for the dues under MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment / SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26E of the SARFAESI Act would be frustrated. If the submission on behalf of respondent No.1 is accepted, then in that case, Section 26E of the SARFAESI Act would become nugatory and would become otiose and/ or redundant. Any other contrary view would be defeating the provision of Section 26E of the SARFAESI Act and also the object and purpose of the SARFAESI Act."
10. Keeping the above view in mind, it is held that the SARFAESI Act is meant for enforcement of security interest which is created in favour of the secured creditor -
financial institution, and provides specific mechanism / provision for the financial assets and security interest. Any other provision(s) would not defeat the provision of Section 26E of the SARFAESI Act and also the object and purpose of the SARFAESI Act.
11. In the instant case, the Bank is a secured creditor under the Act. Therefore, the Bank has first valid charge over the property in question by way of mortgage and has Page 27 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023 NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined first priority under Section 26E of the Act to recover its dues from it. Since respondent No.3 has purchased the property in question from the State Tax Authorities, the State Tax Authorities are liable to transfer the total sale consideration received from the property in question to the petitioners. The debts due to Bank / Financial Institution - a secured creditor shall be paid in priority over other debts/taxes payable to the State Government is the law laid down by the various provisions of the Act as well as by the various decisions of this Court and of the Hon'ble Apex Court as noted above.
The petitioner has no concern with the dues of the State Authorities. If the State Authorities have dispute qua their dues, they can avail appropriate legal remedy before appropriate forum against the appropriate person/s in accordance with law. Under these circumstances, the petitioner cannot be left in lurch. The petitioner therefore is required to be protected. Moreover, now it is well settled legal position that the mortgagor bank/financial institution has priority to recover the dues against any charges of the State Government or Central Government.
12. In view of above, the following order is passed.
12.1 The present petition is partly allowed.
Page 28 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023NEUTRAL CITATION C/SCA/18302/2021 JUDGMENT DATED: 20/01/2023 undefined 12.2 Respondents No.1 and 2 are directed to transfer the amount of Rs.1,74,00,000/- to the petitioners received towards sale of the property in question, as the petitioners are the secured creditors and they have first right to recover their dues.
12.3 It would be open for respondents No.1 and 2 -
Tax Authorities to initiate appropriate proceedings before appropriate forum against the concerned person/s / firm to recover its dues, in accordance with law.
12.4 Rule is made absolute to the aforesaid extent.
Sd/-
(SONIA GOKANI, J) Sd/-
(SANDEEP N. BHATT,J) M.H. DAVE Page 29 of 29 Downloaded on : Sun Sep 17 21:01:21 IST 2023