Orissa High Court
A.F.R. Sundaram Home Finance vs District Magistrate-Cum- .... ... on 29 February, 2024
Bench: D. Dash, G. Satapathy
IN THE HIGH COURT OF ORISSA AT CUTTACK
W.P. (C) No.33521 of 2023
In the matter of an application under Articles 226 & 227 of
the Constitution of India, 1950.
----
A.F.R. Sundaram Home Finance .... Petitioner Limited (earlier known as Sundaram BNP Paribas Home Finance Limited), Chennai
-versus-
District Magistrate-Cum- .... Opposite Parties & Collector, Khordha & Others Appeared in this case by Hybrid Arrangement (Virtual/Physical Mode):
========================================================= For Petitioner - Mr. Nilakantha Dash and S.K.Aziz (Advocates) For Opposite Parties- Mr. G.N. Rout, Addl. Standing Counsel for O.P.1 CORAM:
MR. JUSTICE D. DASH MR. JUSTICE G. SATAPATHY Date of Hering: 30.11.2023 : Date of Judgment: 29.02.2024 D. Dash,J. The Petitioner is a Company incorporated under Indian Companies Act, 1956 and regulated under the Reserve Bank of India Act, 1934 being a Non-Banking Financial Institution under the guidelines of the Reserve Bank of India, Page 1 of 34 // 2 // basically deals with advancing of the loans for construction of the house and other term loans against the properties.
By filing this writ petition, the Petitioner has invoked the jurisdiction of this Court under Articles 226 & 227 of the Constitution of India, seeking quashment of an order dated 14.09.2023, passed by the District Magistrate-cum-Collector, Khurda (Opposite Party No.1) in Bank Misc. Case No.73 of 2016 in the matter of an application under section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, 'SARFAESI Act') filed by the Petitioner seeking assistance in taking possession of the secured asset, i.e., the immovable property on which security interest has been created towards the loan advanced by the Petitioner-Company to the Opposite Party No.2
2. Facts necessary for the purpose are as under:-
The Petitioner has advanced loan to the Opposite Party No.2 to the tune of Rs.40 lacs. The Opposite Party No.3 is the co-
borrower/guarantor to the said loan. Since there was failure on their part to discharge the obligations in timely depositing the instalments fixed for repayment ultimately leading to financial indiscipline, taking recourse of the provision contained in the SARFAESI Act, the Petitioner classified the said loan account as Non-Performing Asset (NPA).
Notice under section 13 (2) of the SARFAESI Act was then issued to the Opposite Party No.2 and 3 and published in Odia Page 2 of 34 // 3 // as well as English Newspapers following the Security Interest (Enforcement) Rules, 2002. Then the next notice under section 13 (4) of the SARFAESI Act was also served upon the Opposite Party No.2 & 3 and published in Odia as well as English daily newspapers.
3. Since the Petitioner found it difficult to take physical possession of the property in question, a move was made resorting to the provisions contained in section 14 of the SARFAESI Act, seeking an order from the Opposite Party No.1 as to provide assistance for taking physical possession of the secured assets. The application has finally been rejected by order dated 14.09.2023, which has been impugned in the present proceeding before us.
The reason for rejection of the application under section 14 of the SARFAESI Act filed by the Petitioner is that the said property has been placed as surety while getting the husband of the Opposite Party No.2 i.e. Opposite Party No.3 on bail in connection with a case pending trial before the Designated Court under the Odisha Protection of Interest of the Depositors Act, 2011 (for short, 'the OPID Act') vide C.T Case No.13 of 2007 and secondly, which is more important is that on account of pendency of the proceeding for confiscation of the said property vide I.A. No.6 of 2018 resorting to the provision of the OPID Act. Page 3 of 34
// 4 //
4. We have heard Mr.N.K.Dash, learned counsel for the Petitioner and Mr.G.N.Rout, learned Additional Standing Counsel at length.
5. In the backdrop of the facts narrated above, further keeping in view of the submissions, as advanced, it is now seen that the property in question which remained as the secured asset in the hands of the Petitioner for recovery of the outstanding dues in connection with the loan advanced to the Opposite Party No.2 for which the Opposite Party No.3 had mortgaged this immovable property; the very same property is also the subject matter of a proceeding under section 4 of the OPID Act for sale and ultimate utilization of the sale proceeds in making payment to the innocent depositors who have been the victims under the Ponzi Company carrying out chit fund & illegal money circulation activities so as to secure their interests. Therefore, the question now arises as to whether the provisions contained in the SARFAESI Act would have a march over the relevant provisions contained in the OPID Act or not.
6. The purpose and objects of SARFAESI Act which came into force on 21.06.2002 is to regulate securitization and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereof.
Page 4 of 34
// 5 // On the other hand, the purpose of the OPID Act, which came into force with effect from 17.08.2013 is to secure the interest of the gullible depositors, who have been the victims in the hands of the fraudster Companies carrying out illegal money circulation and chit fund activities.
The OPID envisages a situation where multitudes of small depositors are defrauded by dubious corporations by luring them with unscrupulous schemes which promised Utopian returns. The object of the Act is tailored to clear-cut situations where hapless depositors are defrauded by dubious "schemes" floated by such dubious "Financial Establishments" as provided under section 2 (d) of the Act. It is imperative that the background of the Act needs to be understood before dealing with the legislation. In recent times a legion of such dubious corporations have burgeoned in different parts of the country which have been alluring naïve investors by promising them quixotic returns under the schemes floated by them. Such companies are essentially sham or paper companies with no real businesses, which arduously market such devious machinations in the form of lucrative "schemes". Gullible common fold mostly acting out of the avarice invest Gullible common folk mostly acting out of avarice invest in such schemes which promise them the moon, hoping to make quick bucks Such schemes loosely find their origin in "collective investment schemes" which were monitored by SEBI, the capital market regulator and guidelines Page 5 of 34 // 6 // framed by it from time to time. However, over the period, such Machiavellian paper companies began to erupt across the country mostly in rural and backward areas having designed the "schemes," with a promise to the depositors with high returns and sometimes even assured some sham services to give it the colour of genuine transactions. This court, on numerous occasions has, unfortunately, come across many such cases where thousands of gullible depositors have lost their hard- earned monies. Cognizant of the shamelessly rampant advertising and marketing that were being carried out (almost on a war footing) by such companies, the legislatures across various states of the country were compelled to bring such enactments to curb the menace that was spreading fast and deep. It is with this backdrop that the legislation in question needs to be viewed with proper perspective.
7. Repugnancy or inconsistency between the provisions of Central and State enactments can firstly occur in case of a Central and a State Act on any field of entry mentioned in List III of the Seventh Schedule (Concurrent List). To such a situation of repugnancy or inconsistency, the provisions of Article 254 of the Constitution would apply. If there is such an inconsistency, Article 254(1) makes it very clear that the Central law will prevail subject, however, to the provisions of Article 254(2) and further subject to proviso to Article 254(2). The above position would be clear from the opinion rendered by a three Page 6 of 34 // 7 // Judges Bench of the Apex Court in M/s.Hoechst Pharmaceuticals Limited & Others -V- State of Bihar; (1983) 4 SCC 45.
8. Para 67 of the aforesaid opinion, which may be usefully noticed is the following terms:-
"67. Article 254 of the Constitution makes provision first, as to what would happen in the case of conflict between a Central and State law with regard to the subjects enumerated in the Concurrent List, and secondly, for resolving such conflict. Article 254(1) enunciates the normal rule that in the event of a conflict between a Union and a State law in the concurrent field, the former prevails over the latter. Clause (1) lays down that if a State law relating to a concurrent subject is 'repugnant' to a Union law relating to that subject, then, whether the Union law is prior or later in time, the Union law will prevail and the State law shall, to the extent of such repugnancy, be void. To the general rule laid down in clause (1), clause (2) engrafts an exception viz., that if the President assents to a State law which has been reserved for his consideration, it will prevail notwithstanding its repugnancy to an earlier law of the Union, both laws dealing with a concurrent subject. In such a case, the Central Act, will give way to the State Act only to the extent of inconsistency between the two, and no more. In short, the result of obtaining the assent of the President to a State Act which is inconsistent with a previous Union law relating to a concurrent subject would be that the State Act will prevail in that State and override the provisions of the Central Act in their applicability to that State only. The predominance of the State law may however be taken away if Parliament legislates under the proviso to clause (2). The proviso to Article 254(2) empowers the Union Parliament to repeal or amend a repugnant State law, either directly, or by itself enacting a law repugnant to the State law with respect to the 'same matter'. Even though the subsequent law made by Parliament does not expressly repeal a State law, even then, the State law will become void as soon as the subsequent law of Parliament creating repugnancy is made. A State law would be repugnant to the Page 7 of 34 // 8 // Union law when there is direct conflict between the two laws. Such repugnancy may also arise where both laws operate in the same field and the two cannot possibly stand together: See Zaverbhai Amaidas v. State of Bombay, (1955) 1 SCR 799; M. Karunanidhi v. Union of India, (1979) 3 SCR 254 and T. Barai v. Henry Ah Hoe, (1983) 1 SCC 177."
9. The above view has been reiterated in State of W.B. vs. Kesoram Industries Ltd. and Ors.;(2004) 10 SCC 201. There are several other pronouncements of the Apex Court on the aforesaid issue. The same, however, would not require any mention as any such reference would be only a multiplication of discussions on what appears to be a settled issue. In the present case, however, the question before this Court is not one of repugnancy between a Central and a State law relatable to an Entry in List III (Concurrent List). No further attention to the above aspect of the matter would, therefore, be required.
10. Article 246 of the Constitution of India is in the following terms.
"246. Subject-matter of laws made by Parliament and by the Legislatures of States:-
(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the 'Union List').
(2) Notwithstanding anything in clause (3), Parliament and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the 'Concurrent List').Page 8 of 34
// 9 // (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the 'State List'). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that such matter is a matter enumerated in the State List"
11. The Hon'ble Apex Court, in case of K.K. Baskaran -V- State represented by its Secretary, Tamil Nadu & Others; (2011) 3 SCC 793; while deciding the question as to the validity of Tamil Nadu Protection of Interests of Depositors (in Financial Establishment) Act, 1997, has held:-
"17. We are of the opinion that the impugned Tamil Nadu Act enacted by the State Legislature is not in pith and substance referable to the legislative heads contained in List I of the Seventh Schedule to the Constitution though there may be some overlapping. In our opinion, in pith and substance the said Act comes under the entries in List II (the State List) of the Seventh Schedule.
18. It often happens that a legislation overlaps both Lists I as well as List II of the Seventh Schedule. In such circumstances, the doctrine of pith and substance is applied. We are of the opinion that in pith and substance the impugned State Act is referable to Entries 1, 30 and 31 of List II of the Seventh Schedule and not Entries 43, 44 and 45 of List I of the Seventh Schedule.
19. It is well-settled that incidental trenching in exercise of ancillary powers into a forbidden legislative territory is permissible vide Constitution Bench decision of this court in State of West Bengal etc. vs. Kesoram Industries Ltd & Ors; (2004) 10 SCC 201 (vide paras 31(4), (5) and (6) and 129 (5).
Sharp and distinct lines of demarcation are not always Page 9 of 34 // 10 // possible and it is often impossible to prevent a certain amount of overlapping vide ITC Ltd. vs. State of Karnataka; 1985 (Supp) SCC 476 (para 17). We have to look at the legislation as a whole and there is a presumption that the legislature does not exceed its constitutional limits.
20. The `financial companies' in the present case had not obtained any licence from the Reserve Bank of India. Hence they are not governed by the Reserve Bank of India Act nor the Banking Regulation Act, 1949.
21. The doctrine of pith and substance means that an enactment which substantially falls within the powers expressly conferred by the Constitution upon a Legislature which enacted it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another legislature. The Court must consider what constitutes in pith and substance the true subject matter of the legislation. If on such examination it is found that the legislation is in substance one on a matter assigned to the legislature then it must be held to be valid even though it incidentally trenches on matters beyond its legislative competence vide Union of India vs. Shah Goverdhan L. Kabra Teachers' College (2002) 8 SCC 228 (vide para 7).
22. For applying the doctrine of pith and substance regard is to be had to the enactment as a whole, its main objects and the scope and effect of its provisions vide Bharat Hydro Power Corporation vs. State of Assam (2004) 4 SCC 489 (vide para
15). For this purpose the language of the Entries in the Seventh Schedule should be given the widest scope of which the meaning is fairly capable vide State of West Bengal vs. Kesoram Industries Ltd (supra) (para 31(4), Union of India vs. Shah Goverdhan Kabra Teachers College (supra) (para 6), ITC Ltd. vs. State of Karnataka (supra) (para 17).
23. Learned counsel for the appellant submitted that the subject-matter of the Tamil Nadu Act being banking, falls within the legislative competence of Parliament under Entry 45 of List I. We do not agree. Admittedly, none of the financial companies in question obtained any licence from the Reserve Page 10 of 34 // 11 // Bank of India. Hence they are not governed by the Reserve Bank of India Act or the Banking Regulation Act. The activities of these financial companies do not, in our opinion, come within the meaning of the term `banking' as defined in the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934.
24. The Tamil Nadu Act was enacted to find out a solution for the problem of the depositors who were deceived on a large scale by the fraudulent activities of certain financial establishments. There was a disastrous consequence both in the economic as well as social life of such depositors who were exploited by false promise of high return of interest. These financial institutions/establishments did not come either under the Reserve Bank of India Act or the Banking Regulation act, and hence they escaped from public control. By the impugned Act the State not only proposed to attach the properties of such fraudulent establishments and the mala fide transferees, but also provided for the sale of such properties and for distribution of the sale proceeds amongst the innocent depositors. Hence, in our opinion, the doctrine of occupied field or repugnancy, has no application in the present case.
25. The object of the Tamil Nadu Act was to give a speedy remedy to the innocent depositors who were vulnerable to the temptation of earning high rates of interest and were victimized by the financial establishments fraudulently. As regards Section 58A of the Companies Act, this prescribes the conditions under which the deposits may be invited or accepted by the companies. On the other hand, the aim and object of the Tamil Nadu Act is totally different.
26. The Tamil Nadu Act was enacted to ameliorate the conditions of thousands of depositors who had fallen into the clutches of fraudulent financial establishments who had raised hopes of high rate of interest and thus duped the depositors. Thus the Tamil Nadu Act is not focused on the transaction of banking or the acceptance of deposit, but is focused on remedying the situation of the depositors who were deceived by the fraudulent financial establishments. The impugned Tamil Nadu Act was intended to deal with neither the banks Page 11 of 34 // 12 // which do the business or banking and are governed by the Reserve Bank of India Act and Banking Regulation Act, nor the non-banking financial companies enacted under the Companies Act, 1956.
27. The Reserve Bank of India Act, the Banking Regulation Act and the Companies Act do not occupy the field which the impugned Tamil Nadu Act occupies, though the latter may incidentally trench upon the former. The main object of the Tamil Nadu Act is to provide a solution to wipe out the tears of several lakhs of depositors to realize their dues effectively and speedily from the fraudulent financial establishments which duped them or their vendees, without dragging them in a legal battle from pillar to post. Hence, the decision of this Court in Delhi Cloth Mills (supra) has no bearing on the constitutional validity of the Tamil Nadu Act.
28. In the case of the Tamil Nadu Act, the attachment of properties is intended to provide an effective and speedy remedy to the aggrieved depositors for the realization of their dues. The offences dealt with in the impugned Act are unique and have been enacted to deal with the economic and social disorder in society, caused by the fraudulent activities of such financial establishments.
29. Under Section 3 & 4 of the Tamil Nadu Act, certain properties can be attached, and there is also provision for interim orders for attachment after which a post decisional hearing is provided for. In our opinion this is valid in view of the prevailing realities.
30. The Court should interpret the constitutional provisions against the social setting of the country and not in the abstract. The Court must take into consideration the economic realities and aspirations of the people and must further the social interest which is the purpose of legislation, as held by Justices Holmes, Brandeis and Frankfurter of the U.S. Supreme Court in a series of decisions. Hence the Courts cannot function in a vacuum. It is for this reason that Courts presume in favour of constitutionality of the statute because there is always a presumption that the legislature understands and correctly Page 12 of 34 // 13 // appreciates the needs of its own people, vide Govt. of Andhra Pradesh vs. P. Laxmi Devi (2008) 4 SCC 720.
31. We fail to see how there is any violation of Article 14, 19(1)(g) or 21 of the Constitution. The Act is a salutary measure to remedy a great social evil. A systematic conspiracy was effected by certain fraudulent financial establishments which not only committed fraud on the depositor, but also siphoned off or diverted the depositor's funds mala fide. We are of the opinion that the act of the financers in exploiting the depositors is a notorious abuse of faith of the depositors who innocently deposited their money with the former for higher rate of interest. These depositors were often given a small pass book as a token of acknowledgment of their deposit, which they considered as a passport of their children for higher education or wedding of their daughters or as a policy of medical insurance in the case of most of the aged depositors, but in reality in all cases it was an unsecured promise executed on a waste paper. The senior citizens above 80 years, senior citizens between 60 and 80 years, widows, handicapped, driven out by wards, retired government servants and pensioners, and persons living below the poverty line constituted the bulk of the depositors. Without the aid of the impugned Act, it would have been impossible to recover their deposits and interest thereon.
32. The conventional legal proceedings incurring huge expenses of court fees, advocates' fees, apart from other inconveniences involved and the long delay in disposal of cases due to docket explosion in Courts, would not have made it possible for the depositors to recover their money, leave alone the interest thereon. Hence, in our opinion the impugned Act has rightly been enacted to enable the depositors to recover their money speedily by taking strong steps in this connection.
33. The State being the custodian of the welfare of the citizens as parens patriae cannot be a silent spectator without finding a solution for this malady. The financial swindlers, who are nothing but cheats and charlatans having no social responsibility, but only a lust for easy money by making false Page 13 of 34 // 14 // promise of attractive returns for the gullible investors, had to be dealt with strongly. The small amounts collected from a substantial number of individual depositors culminated into huge amounts of money. These collections were diverted in the name of third parties and finally one day the fraudulent financers closed their financial establishments leaving the innocent depositors in the lurch.
12. In our given situation of repugnancy or inconsistency is between to a subsequent State law (OPID Act) covered by Entry 1, 30 & 31 of List II of the Seventh Schedule and an earlier Central law (SARFAESI Act) relatable to Entries 43, 44 & 45 of the List I of the Seventh Schedule. How such a situation is to be resolved and answered and which legislation would have the primacy is the moot question that arises for consideration in the present appeals.
13. In interpreting Article 246 regard must be had to the constitutional scheme which visualises a federal structure giving full autonomy to the Union Parliament as well as to the State legislatures in their respective/demarcated fields of legislation. The problem may, however, become a little more complex than what may seemingly appear as the two legislations may very well be within the respective domains of the concerned legislatures and, yet, there may be intrusion into areas that fall beyond the assigned fields of legislation. In such a situation it will be plain duty of the Constitutional Court to see if the conflict can be resolved by acknowledging the mutual existence of the two legislations. If that is not possible, then by virtue of the provisions of Article 246(1), the Parliamentary legislation would prevail and Page 14 of 34 // 15 // the State legislation will have to give way notwithstanding the fact that the State legislation is within the demarcated field (List II). This is the principle of federal supremacy which Article 246 of the Constitution embodies. The said principle will, however, prevail provided the pre- condition exists, namely, the Parliamentary legislation is the dominant legislation and the State legislation, though within its own field, has the effect of encroaching on a vital sphere of the subject or entry to which the dominant legislation is referable. This is the principle that is discernible from the Constitution Bench judgment of this Court in State of West Bengal and Ors. vs. Committee for Protection of Democratic Rights, West Bengal and Ors.; (2010) 3 SCC 571 Paragraphs 25, 26 and 27 which illuminates the issue may be conveniently extracted below:-
"25. The non obstante clause in Article 246(1) contemplates the predominance or supremacy of the Union Legislature. This power is not encumbered by anything contained in clauses (2) and (3) for these clauses themselves are expressly limited and made subject to the non obstante clause in Article 246(1). The State Legislature has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule and it also has the power to make laws with respect to any matters enumerated in List III (Concurrent List). The exclusive power of the State Legislature to legislate with respect to any of the matters enumerated in List II has to be exercised subject to clause (1) i.e. the exclusive power of Parliament to legislate with respect to matters enumerated in List I. As a consequence, if there is a conflict between an entry in List I and an entry in List II, which is not capable of reconciliation, the power of Parliament to legislate with respect to a matter enumerated Page 15 of 34 // 16 // in List II must supersede pro tanto the exercise of power of the State Legislature.
26. Both Parliament and the State Legislature have concurrent powers of legislation with respect to any of the matters enumerated in List III. The words "notwithstanding anything contained in clauses (2) and (3)" in Article 246(1) and the words "subject to clauses (1) and (2)"
in Article 246(3) lay down the principle of federal supremacy viz. that in case of inevitable conflict between the Union and State powers, the Union power as enumerated in List I shall prevail over the State power as enumerated in Lists II and III and in case of an overlapping between Lists II and III, the latter shall prevail.
27. Though, undoubtedly, the Constitution exhibits supremacy of Parliament over the State Legislatures, yet the principle of federal supremacy laid down in Article 246 of the Constitution cannot be resorted to unless there is an irreconcilable direct conflict between the entries in the Union and the State Lists. Thus, there is no quarrel with the broad proposition that under the Constitution there is a clear demarcation of legislative powers between the Union and the States and they have to confine themselves within the field entrusted to them. It may also be borne in mind that the function of the lists is not to confer powers; they merely demarcate the legislative field........................"
14. Equally illuminating is the view available in the opinion of the Apex Court rendered in re. Special Reference No. 1 of 2001[4], which is reproduced below.
"13. The Constitution of India delineates the contours of the powers enjoyed by the State Legislature and Parliament in respect of various subjects enumerated in the Seventh Schedule. The rules relating to distribution of powers are to be gathered from the various provisions contained in Part Page 16 of 34 // 17 // XI and the legislative heads mentioned in the three lists of the Schedule. The legislative powers of both the Union and State Legislatures are given in precise terms. Entries in the lists are themselves not powers of legislation, but fields of legislation. However, an entry in one list cannot be so interpreted as to make it cancel or obliterate another entry or make another entry meaningless. In case of apparent conflict, it is the duty of the court to iron out the crease and avoid conflict by reconciling the conflict. If any entry overlaps or is in apparent conflict with another entry, every attempt shall be made to harmonise the same.
14. When the question arose about reconciling Entry 45 of List I, duties of excise, and Entry 18 of List II, taxes on the sale of goods, of the Government of India Act, 1935, Sir Maurice Gwyer, C.J. in Central Provinces and Berar Act No. XIV of 1938, In re, (1939) FCR 18, at pp. 42-44 observed:-
"......a grant of the power in general terms, standing by itself, would no doubt be construed in the wider sense, but it may be qualified by other express provisions in the same enactment, by the implications of the context, and even by considerations arising out of what appears to be the general scheme of the Act."
It was further observed: -
"........an endeavour must be made to solve it, as the Judicial Committee have said, by having recourse to the context and scheme of the Act, and a reconciliation attempted between two apparently conflicting jurisdictions by reading the two entries together and by interpreting, and, where necessary modifying the language of the one by that of the other. If indeed such a reconciliation should prove impossible, then, and only then, will the non obstante clause operate and the federal power prevail."
15. Although Parliament cannot legislate on any of the entries in the State List, it may do so incidentally while essentially dealing with Page 17 of 34 // 18 // the subject coming within the purview of the entry in the Union List. Conversely, the State Legislature also while making legislation may incidentally trench upon the subject covered in the Union List. Such incidental encroachment in either event need not make the legislation ultra vires the Constitution. The doctrine of pith and substance is sometimes invoked to find out the nature and content of the legislation. However, when there is an irreconcilable conflict between the two legislations, the Central legislation shall prevail. However, every attempt would be made to reconcile the conflict."
16. The federal structure under the constitutional scheme can also work to nullify an incidental encroachment made by the Parliamentary legislation on a subject of a State legislation where the dominant legislation is the State legislation. An attempt to keep the aforesaid constitutional balance intact and give a limited operation to the doctrine of federal supremacy can be discerned in the concurring judgment of in ITC Ltd. vs. Agricultural Produce Market Committee and Ors.; (2002) 9 SCC 232, wherein after quoting the observations of the Apex Court in the case of S.R. Bomai vs. Union of India; (1994) 3 SCC 1 (para 276), the Hon'ble Judge has gone to observe as follows (para 94 of the report):-
"276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-à-vis the States does not mean that States are mere appendages of the Centre. Within the sphere allotted to them, States are supreme. The Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or Page 18 of 34 // 19 // tends to have the effect of whittling down the powers reserved to the States.
94. Although Parliament cannot legislate on any of the entries in the State List, it may do so incidentally while essentially legislating within the entries under the Union List. Conversely, the State Legislatures may encroach on the Union List, when such an encroachment is merely ancillary to an exercise of power intrinsically under the State List. The fact of encroachment does not affect the vires of the law even as regards the area of encroachment. [A.S. Krishna vs. State of Madras, AIR 1957 SC 297; Chaturbhai M. Patel vs. Union of India, (1960) 2 SCR 362; State of Rajasthan vs. G. Chawla, AIR 1959 SC 544; Ishwari Khetan Sugar Mills (P) Ltd. vs. State of U.P., (1980) 4 SCC 136]. This principle commonly known as the doctrine of pith and substance, does not amount to an extension of the legislative fields. Therefore, such incidental encroachment in either event does not deprive the State Legislature in the first case or Parliament in the second, of their exclusive powers under the entry so encroached upon. In the event the incidental encroachment conflicts with legislation actually enacted by the dominant power, the dominant legislation will prevail."
17. The aforesaid view in the concurring judgment of Ruma Pal, J. in ITC Ltd. vs. Agricultural Produce Market Committee and Ors. (supra), seems to have been echoed in a later pronouncement of this Court in Vishal N. Kalsaria vs. Bank of India; (2016)3 SCC 762, wherein the Apex Court had held that the provisions of the Act of 2002 will not have an overriding effect on the provisions of the State Rent Control Acts. Page 19 of 34
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18. In the case at hand, the conflict between the Central and State is on account of an apparent over stepping by the provisions of the State Act dealing with the security of the innocent depositors who have fallen as the victims in the hands of the fraudster Companies into an area of banking covered by the Central Act, which is to regulate the securitization and reconstruction of financial asset and enforcement of security interest etc., The test therefore would be to find out as to which is the dominant legislation having regard to the area of encroachment.
19. The provisions of SARFAESI Act enable the financial institution to take possession of any property whereupon security interest has been created in its favour, more particularly, section 13 of the SARFAESI Act enable the financial institution to take process of sale such property of any person to realize its dues and section 14 of the said Act stands to render assistance to the financial institution to take process of the said property for the purpose.
The above Central Act had from the beginning in section- 35 as under: -
"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."Page 20 of 34
// 21 // The objects and reasons are that the provisions shall override other laws and the provisions of the 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.
The above provision was there from the beginning and thereafter the OPID Act came into force on 17.08.2013 after having received the assent of the President on 12.08.2013.
20. Coming to the State Legislation which has received the assent of the President on 12.08.2013 i.e. OPID Act, whose interplay with the SARFAESI Act is under test, we too find section-3 of the OPID Act beginning with non-obstante at clause, reads as under:-
"3. Notwithstanding anything contained in any other law for the time being in force, -
(i) where, upon complaints received from a number of depositors that any Financial Establishment defaults the return of deposits after maturity or fails to pay interest on deposit or fails to provide the service for which deposit has been made, or
(ii) where the Government have reason to believe that any Financial Establishment is acting in a calculated manner with an intention to defraud the depositors, and if the Government are satisfied that such Financial Establishment is not likely to return the deposits or to make payment of interest or to provide the service, the Government may, in order to protect the interest of the depositors of such Financial Page 21 of 34 // 22 // Establishment, pass an ad-interim order attaching the money or other property alleged to have been procured either in the name of the Financial Establishment or in the name of any other person from and out of the deposits collected by the Financial Establishment, or if it transpires that such money or other property is not available for attachment or not sufficient for repayment of the deposits, such other property of the said Financial Establishment or the Promoter, Director, Partner or Manager or Member of the said Financial Establishment or a person who has borrowed money from the Financial Establishment to the extent of his default or such other properties of that person in whose name properties where purchased from and out of the deposits collected by the Financial Establishment, as the Government may think fit and transfer the control over the said money or property to the Competent Authority"
The other important provisions i.e. section 9 of the OPID Act indicating the follow up actions read as follows: -
"9. Powers of Designated Court regarding attachment, sale, etc.: -
(1) Upon receipt of an application under section 4, the Designated Court shall issue to the Financial Establishment or to any other person whose property is attached by the Government under section 3, a notice accompanied by the application and affidavits and of the evidence, if any, recorded, calling upon the said Establishment or the said person to show cause on a date to be specified in the notice as to why the order of attachment should not be made absolute and the properties so attached be sold in public auction.Page 22 of 34
// 23 // (2) The Designated Court shall also issue such notice to all other persons represented to it as having or being likely to claim any interest or title in the property of the Financial Establishment or the person to whom the notice is issued under sub-section (1), calling upon such person to appear on the same date as that specified in the notice and make objection if he so desires to the attachment of the property or any portion thereof on the ground that he has an interest in such property or portion thereof.
(3) Any person claiming an interest in the property attached or any portion thereof may, notwithstanding that no notice has been served upon him under this section, make an objection as aforesaid to the Designated Court at any time before an order is passed under sub-section (4) or sub-section (6).
(4) If no cause is shown and no objections are made on or before the specified date, the Designated Court shall forthwith pass an order making the ad-interm order of attachment absolute and direct the Competent Authority to sell the property so attached by public auction and realize the sale proceeds.
(5) If cause is shown or any objection is made as aforesaid the Designated Court shall proceed to investigate the same and in so doing, as regards the examination of the parties and in all others respects, the Designated Court shall, subject to the provisions of this Act, follow the procedure and exercise all the powers of a court in hearing a suit under the Code of Civil Procedure, 1908 and any person making an objection shall be required to adduce evidence to show that on the date of the attachment he had some interest in the property attached.
(6) After investigation under sub-section (5), the Designated Court shall pass an order, within a period of one hundred and eighty days from the date of receipt of an application Page 23 of 34 // 24 // under sub-section (3) of section 4, either making the ad- interim order of attachment absolute or varying it by releasing a portion of the property from attachment or cancelling the ad-interim order of attachment and then direct the Competent Authority to sell the property so attached by public auction and realize the sale proceeds:
Provided that the Designated Court shall not release from attachment any interest, which it is satisfied that the Financial Establishment or the person referred to in sub- section (1) has in the property, unless it is also satisfied that there will remain under attachment an amount or properly of a value not less than the value that is required for repayment to the depositors of such Financial Establishment.
(7) The Designated Court shall, on an application by the Competent Authority, pass such order or issue such direction as may be necessary for the equitable distribution among the depositors of the money attached or realized out of the sale."
21. The SARFAESI Act is relatable to entry of banking which is included in entries in 43, 44 & 45 of list 1 of the 7th Schedule. Sale of mortgaged property by a bank is inseparable and integral part of the business of banking. The object of the State Act as already noted on the other hand is the basically concerned with refund/return of money to the gullible depositors who have been defrauded. The words found in the statement of object and reasons viz. in the public interest, in order to regulate the activities of such financial establishment therefore, mean that the OPID Act had been enacted to protect the interest of the depositors. Therefore, the State Act having been assented to by the President on 12.08.2013, the provision contained in the OPID Page 24 of 34 // 25 // Act will prevail notwithstanding its repugnancy to the SARFAESI Act. The SARFAESI Act will give way to the OPID Act only to the extent of the inconsistency between the two and no more. In short, with the assent of the President to the State OPID Act, some provisions of which stand in conflict/ inconsistent with the provision of SARFAESI Act, said provisions of the OPID Act will prevail in the State of Odisha and over ride the provision of SARFAESI Act to said extent and the attachment as provided in OPID Act may stand on the way of the same in taking over possession as the secured asset and transfer for recovery of the loan dues at the behest of the Bank/Financial Institution advancing the loan.
22. The above, however, having remained as the position, till coming into force of the provision contained in section 26E of the SARFAESI Act w.e.f. 01.09.2016 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 the borrower, priority to secured Page 25 of 34 // 26 // creditors in payment of debt shall be subject to the provisions of that Code."
23. It provides that notwithstanding anything inconsistent therewith contained in any other law for the time being in force, after registration of the security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenue taxes and cesses and other rates payable to Central Government or State Government or local authority. This priority is however subject to the provisions of Insolvency and Bankruptcy Code.
As per the OPID Act, the money being realized by sale of the attached property, as per order of the Designated Court, the same is essentially for distribution amongst the depositors. Therefore, the State Government by virtue of the statutory provisions and pressing the same into service use to sale the property as if it has been confiscated and has vested with the state and thus being the owner and then playing the role of a welfare State distribute the same to the innocent duped depositors as per the order of the Designated Court. Upon sale of the property, the funds collected remains in the hands of the State awaiting further order of the Designated Court.
24. At this juncture, we feel it proper to refer to the Full Bench decision of the Bombay High Court in case of "Jalagaon Janta Sahakari Bank Ltd. and another vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai and Anr.; 2022 (5) Mh. L.J. 691". The Hon'ble Page 26 of 34 // 27 // Full Bench has clearly held hat if the security interest of the secured creditor is registered with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), then the secured creditor would get priority over the dues of the Government. The relevant portions of the decision reads as thus:-
"84. ..............The next query that would obviously follow is:
whether the word 'priority' appearing in section 26E of the SARFAESI Act, i.e., "...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", was used without a purpose? This reply has to be in the negative.
85. Priority means precedence or going before (Black's Law Dictionary). In the present context, it would mean the right to enforce a claim in preference to others. In view of the splurge of 'first charge' used in multiple legislation, the Parliament advisedly used the word 'priority over all other dues' in the SARFAESI Act to obviate any confusion as to inter-se distribution of proceeds received from sale of properties of the borrower/dealer. If a secured asset has been disposed of by sale by taking recourse to the Security Interest (Enforcement) Rules, 2002 it would appear to be reasonable to hold, particularly having regard to the non-
obstante clauses in sections 31 B and section 26, that the dues of the secured creditor shall have 'priority' over all other including all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
86. A debt that is secured or which, by reason of the provisions of a statute, becomes a 'first charge' on the Page 27 of 34 // 28 // property, in view of the plain language of Article 372 of the Constitution, must be held to prevail over a Crown debt, which is an unsecured one. The law, as it stands even today, is that a Crown debt enjoys no priority over secured debts. This principle has been repeatedly reaffirmed including, inter alia, in the decision of the Supreme Court reported in (2000) 5 SCC 694 (Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co.) where the Court observed:"
"10. However, the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor. It is only in cases where the Crown's right and that of the subject meet at one and the same time that the Crown is in general preferred. Where the right of the subject is complete and perfect before that of the King commences, the rule does not apply, for there is no point of time at which the two rights are at conflict, nor can there be a question which of the two ought to prevail in a case where one, that of the subject, has prevailed already. In Giles v. Grover it has been held that the Crown has no precedence over a pledge of goods. In Bank of Bihar v. State of Bihar the principle has been ealizedd by this Court holding that the rights of the pawnee who has parted with money in favour of the pawnor on the security of the goods cannot be extinguished even by lawful seizure of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgage (TLL, 7th Edn., p. 386) - 'It seems a government debt in India is not entitled to precedence over a prior secured debt'."Page 28 of 34
// 29 //
87. It would also not be inapposite to draw guidance from the decision of the Supreme Court reported in (2006) 10 SCC 452 (ICICI Bank Ltd. vs. SIDCO Leathers Ltd.) where the Court ruled as follows:
"41. While enacting a statute, Parliament cannot be presumed to have taken away a right in property. Right to property is a constitutional right. Right to recover the money lent by enforcing a mortgage would also be a right to enforce an interest in the property. The provisions of the Transfer of Property Act provide for different types of charges. In terms of Section 48 of the Transfer of Property Act claim of the first charge-holder shall prevail over the claim of the second charge-holder and in a given case where the debts due to both, the first charge- holder and the second charge-holder, are to be ealized from the property belonging to the mortgagor, the first charge-holder will have to be repaid first. There is no dispute as regards the said legal position.
42. Such a valuable right, having regard to the legal position as obtaining in common law as also under the provisions of the Transfer of Property Act, must be deemed to have been known to Parliament. Thus, while enacting the Companies Act, Parliament cannot be held to have intended to deprive the first charge-holder of the said right. Such a valuable right, therefore, must be held to have been kept preserved. [See Workmen v. Firestone Tyre and Rubber Co. of India (P) Ltd., (1973) 1 SCC 813].
43. If Parliament while amending the provisions of the Companies Act intended to take away such a valuable right of the first charge-holder, we see no reason why it could not have stated so explicitly.
Deprivation of legal right existing in favour of a person cannot be presumed in construing the Page 29 of 34 // 30 // statute. It is in fact the other way round and thus, a contrary presumption shall have to be raised.
44. Section 529(1)I of the Companies Act speaks about the respective rights of the secured creditors which would mean the respective rights of secured creditors vis-à-vis unsecured creditors. It does not envisage respective rights amongst the secured creditors. Merely because Section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of Section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated.
45. If we were to accept that inter se priority of secured creditors gets obliterated by merely responding to a public notice wherein it is specifically stated that on his failure to do so, he will be excluded from the benefits of the dividends that may be distributed by the Official Liquidator, the same would lead to deprivation of the secured creditor of his right over the security and would bring him on par with an unsecured creditor. The logical sequitur of such an inference would be that even unsecured creditors would be placed on par with the secured creditors. This could not have been the intendment of the legislation."
88. Bare perusal of the 2016 Amending Act would show that the dues of the Central/State Governments were in the specific contemplation of the Parliament while it amended the RDDB Act and the SARFAESI Act, both of which make specific reference to debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority and ordains that the dues of a secured creditor will have 'priority', i.e., take precedence. Significantly, the statute Page 30 of 34 // 31 // goes quite far and it is not only revenues, taxes, cesses and other rates payable to the State Government or any local authority but also those payable to the Central Government that would have to stand in the queue after the secured creditor for payment of its dues.
89. The effect of using the word 'priority' in section 26E of the SARFAESI Act, according to us, is this. The rights accorded to 'first charge' holders by Central as well as State legislation having been known to the Parliament, in such a situation, what the Parliament intended by exercising its legislative power by introducing amendments in the SARFAESI Act, more particularly by incorporating section 26E therein, was to explicitly make the valuable right of the 'first charge' holder, subordinate to the dues of a second creditor. The rights of such of the first charge holders accorded by several legislations enacted by the State, having regard to the language in which section 26E is couched, would rank subordinate to the right of the secured creditor as defined in section 2(1)(zd) subject, of course, to compliance with the other provisions of the statute. Acceptance of the contra- arguments of learned counsel for the State/respondents would undo what the Parliament has chosen to do.
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92. In view of the foregoing discussion, we have no hesitation to hold that the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I & B Code would rank superior to the dues of the relevant department of the State Government."
(emphasis supplied) It has also been held in that case of Jalagaon Janta Sahakari Bank Ltd. and Anr. (supra) at para 189 to 192 thereof that:- Page 31 of 34
// 32 //
189. In the case at hand, we have seen that the secured creditor had registered the security interest with CERSAI on 25th October 2017. Post enforcement of Chapter IV-A of the SARFAESI Act, under sub-section (4) of section 26B of the SARFAESI Act, the department of the Government which professes to recover any tax or other Government dues, is enjoined to register such claim with CERSAI.
190. It does not appear that the respondent no. 1 registered its claim or attachment over the secured asset with CERSAI, post enforcement of Chapter IV-A of the SARFAESI Act. Sub-section (2) of section 26C provides that any attachment order subsequent to the registration of the security interest with CERSAI, shall be subject to such prior registered claim.
191. In our view, in the instant case, with the enforcement of Chapter IV-A of the SARFAESI Act, the claim of the respondent no.7 Bank, the secured creditor, was extolled to a higher pedestal and the subsequent act of recording a charge in the record of right of the secured asset cannot dilute the right of priority in payment, under sections 26C(2) and 26 of the SARFAESI Act. As a necessary corollary, the non-registration of the claim and/or attachment order by the respondent no.1 under section 26B(4) of the SARFAESI Act, can only be at the peril of the department. Mere recording of the purported charge in the record of right of the secured asset, in the absence of the registration with CERSAI, in our considered view, cannot be to the detriment of the auction purchaser, though the auction sale was on "as is where is and as is what is basis".
192. Mr. Sen, learned senior advocate appearing for the petitioner submitted that in the event the Court is persuaded to allow the writ petition, it is necessary to extend the time to adjudicate the stamp duty on the sale Page 32 of 34 // 33 // certificate and register the same. There are provisions in the Maharashtra Stamp Act, 1958 (sections 31 and 32) and the Registration Act, 1908 (sections 23 and 25) which stipulate the time for tendering the instrument for adjudication, determination of stamp duty thereon and registration of the instrument from the date of its execution. Since the petitioner had instantaneously lodged the sale certificate for adjudication, we are inclined to direct that the time commencing from the lodging of the said sale certificate till the decision of this writ petition, be excluded from consideration in computing the statutory period for adjudication of the stamp duty and registration of the instrument."
25. Accordingly, after the above amendment of SARFAESI Act by introduction of the provision of Section 26E, which again begins with the non obstante clause, the matter stands at rest as said provision overrides the provisions contained in the OPID Act subject of course on fulfillment of certain conditions.
As per the settled position of law, if legislature confers the later enactment with a non-obstante clause, it means that the legislature wanted the subsequent/later enactment to prevail. Thus, a 'priority' conferred/provided under section 26E of the SARFAESI Act subject to the conditions as laid down being fulfilled would prevail over the recovery mechanism of the OPID Act, which even though had received the Presidential assent after the SARFAESI Act, the very amendment to SARFAESI Act with introduction of section 26E in the said Act coming into force thereafter carrying a non-abstante clause Page 33 of 34 // 34 // would have a march over all said provisions of the OPID Act which had its march over the SARFAESI when it had come into force after the Presidential assent.
26. In the wake of all the aforesaid, since we find that the above aspects have not been touched in the impugned order dated 14.09.2023, passed by the District Magistrate-cum- Collector, Khurda (Opposite Party No.1) in Misc. Case No.73 of 2016 upon an application under section 14 of the SARFAESI Act we are inclined to quash the said order impugned before us and remit the matter for fresh disposal in accordance with law, keeping in view the discussions made hereinabove and within the ambit and scope of section 14 of the SARFAESI Act.
(D. Dash), Judge.
G. Satapathy, I agree.
(G. Satapathy), Judge.
Narayan Signature Not Verified Digitally Signed Signed by: NARAYAN HO Reason: Authentication Location: OHC Date: 05-Mar-2024 12:19:04 Page 34 of 34