Gujarat High Court
Hdfc Bank Ltd vs State Of Gujarat on 6 August, 2024
Author: Vaibhavi D. Nanavati
Bench: Vaibhavi D. Nanavati
NEUTRAL CITATION
C/SCA/187/2024 JUDGMENT DATED: 06/08/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 187 of 2024
FOR APPROVAL AND SIGNATURE:
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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HDFC BANK LTD.
Versus
STATE OF GUJARAT & ORS.
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Appearance:
MR HARNISH V DARJI(3705) for the Petitioner(s) No. 1
MS POOJA K ASHAR, AGP for the Respondent(s) No. 1,2,3
MS SEJAL K MANDAVIA(436) for the Respondent(s) No. 4
NOTICE SERVED for the Respondent(s) No. 2,3
SERVED BY RPAD (N) for the Respondent(s) No. 2,3
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CORAM:HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
Date : 06/08/2024
ORAL JUDGMENT
1. Issue Rule, returnable forthwith. Ms. Pooja K. Ashar, learned AGP waives service of notice of rule for and on behalf of the respondent Nos.1 to 3 and Ms. Sejal K. Mandavia, Page 1 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined learned advocate waives service of notice of rule for and on behalf of the respondent No.4.
2. Heard Mr. Harnish V. Darji, learned advocate appearing for the petitioner, Ms. Pooja K. Ashar, learned AGP appearing for the respondent Nos.1 to 3 and Ms. Sejal K. Mandavia, learned advocate appearing for the respondent No.4.
3. The petitioner herein is a Banking Company within the meaning of Section 2(1)(c) of the SARFAESI Act, 2002 and is engaged in banking activities including providing loan facilities to its customers and securing such loans by way of charges/mortgage over the property/properties offered by the customers/borrowers.
3.1 The original borrower, Kalyan Tiles, A Partnership Firm, had approached the petitioner bank for the procurement of finance by way of Loan against property being A/c. No. 50200024303142 to the tune of Rs. 1,75,00,000/-. At the time of procuring the aforesaid financial assistance from the petitioner-Bank, the borrowers-opponents herein have executed requisite documents in favour of the petitioner-Bank.
The borrower availed financial assistance vide A/c.
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No.50200024303142 to tune of Rs. 1,75,00,000/- by way of above referred financial facility and thereby created valid charge/ mortgage in favour of the petitioner- Bank over being all those part and parcel of Industrial Land and Building with Construction of "KALYAN TILES", Village Charwada, Halwad Road, Near SISCON Ceramic & Somnath Cotex, Taluka Halwad, District: Surendrnagar, and situated on the land admeasuring 23480 Square Meters at Revenue Survey No. 51 Paikee of Village : Charwada, Taluka Halwad, District: Surendrnagar, owned by Kalyan Tiles & Others, original borrowers, by depositing the original title deeds of the subject property. Thus, the property as mentioned herein above is the "secured asset"
within the meaning of Section 2(1)(c) of the SARFAESI Act, 2002.
3.2 It is the case of the petitioner that the opponents failed to repay the loan amount as per the terms and conditions agreed between the parties and the loan account has been classified as Non-Performing Asset (NPA) on 01.10.2019. That, on 15.11.2019, the outstanding amount was of Rs.1,40,76,037.61, which includes the principal amount as well as the interest amount. Due continuous and intentional default on the part of Page 3 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined the borrower, the petitioner - Bank was constrained to exercise powers conferred under Section 13(2) of the SARFAESI Act, 2002, by issuing notice to the borrowers on 26.11.2019.
Subsequently, the petitioner herein approached the District Magistrate under Section 14 of the SARFAESI Act, 2002, to take and handover the possession of the secured assets wherein, by order dated 30.04.2021, the Mamlatdar and the Executive Magistrate, Halvad, was ordered to take possession of the secured assets and hand over the same to the petitioner
- Bank. The Executive Magistrate, Halvad, executed the said order dated 30.04.2021 and took the possession of the secured assets and handed over the same to the petitioner - Bank on 06.05.2021; duly produced at Annexure - C. 3.3 The Talati-cum-Mantri - respondent No.4 herein had registered the charge of the State Tax Officer, Unit No.81, Dhangdhra, on the secured assets of the petitioner, land bearing Survey No.51 paiki, of Village : Chavda, Taluka :
Halvad, District : Surendranagar. The petitioner - Bank wrote a letter to the respondent No.2 and respondent No.4 and informed them, as per provision of Section 26E of the SARFAESI Act, 2002, there could not have been any charge on the Page 4 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined secured assets of the petitioner - Bank. The said communication/representation was not answered to and in view thereof, the petitioner has filed the present petition under Article 226 of the Constitution of India and has prayed for the following reliefs:
"8. The petitioner therefore most humbly prays that the Honourable High Court may be pleased:-
(A) To issue appropriate writ, order or direction and be pleased to hold the action of the respondent no.4 authority of recording charge, on secured Assets of the petitioner bank, i.e. Non Agricultural Land bearing revenue survey no.51 paiki, of Village : Chardwa, Taluka : Halvad, District :
Surendranagar, as illegal, arbitrary and contrary to provisions of the SARFAESI Act, 2002, and further be pleased to quash and set aside the action of the respondent no.4 authority in recording charge on the secured assets of the petitioner bank, and further be pleased to direct the respondent no.4 authority to remove the charge from the village form no.- 8 of the Non- Agricultural Land bearing revenue survey no.51 paikki, of Village : Chardwa, Taluka : Halvad, District : Surendranagar, in the interest of justice.
(B) Pending admission hearing and till final disposal of this petition, be pleased to stay the operation, implementation and execution of the registration of charge, on secured assets, i.e. Non - Agricultural land bearing revenue survey no.51 paiki, of Village: Chardwa, Taluka : Halvad, District : Surendranagar, in the interest of justice.
(C) To grant such other and further reliefs as may be deemed fit and proper, in the facts and circumstances of the case in pursuance of the law."
4. Mr. Harnish V. Darji, learned advocate appearing for the petitioner, submitted that the impugned action undertaken by the respondent No.4 is contrary to the provisions of Section 14 and Section 26E of the SARFAESI Act, 2002. It is submitted that the dictum of Section 26E of the SARFAESI Act, 2002 clearly provides that the secured creditor is to be given priority over Page 5 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined all the charges. In the facts of the present case, Section 14 order is already passed and the possession of the secured assets is taken and handed over to the petitioner - Bank.
Thereafter, the respondent authority entered the charge on the secured assets of the petitioner - Bank, which is violative of the statutory provision of the SARFAESI Act, 2002 and in view thereof, the impugned communication is required to be quashed and set aside.
4.1 Reliance is placed on the ratio laid down in case of Mahadev Cotton Industries vs. Department of Central Sales Tax in Special Civil Application No.15391 of 2022 whereby, by order dated 18.01.2023, the Hon'ble Division Bench held that the charge created by the respondent on the property, is required to be cancelled or withdrawn as the same would be sold by the Financial Institution through the right conferred to the Financial Institution under the SARFAESI Act. The aforesaid was also subject matter of consideration in case of Bank of Baroda vs. State of Gujarat in Special Civil Application No.12995 of 2018, order dated 16.09.2019 whereby, it was held that Secured Creditor would have priority over the first charge created under a State legislation. It is submitted that Page 6 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined the aforesaid issue was also considered in Special Civil Application No.9565 of 2023.
4.2 Placing reliance on the aforesaid submissions, it is submitted that the prayers, as prayed for by the petitioner, in the present petition, are required to be allowed.
5. Ms. Pooja K. Ashar, learned AGP appearing for the respondent Nos.1 to 3, submitted that no interference is called for under Article 226 of the Constitution of India to interfere in the charge that is created in favour of the respondent - State authority by the respondent No.4 on 17.08.2023.
6. Ms. Sejal K. Mandavia, learned advocate appearing for the respondent No.4, upon instruction, submitted that the respondent No.4 attached the charge of the respondent No.2 in view of the fact that it was not known to the respondent No.4 about the charge created in favour of the petitioner herein. It is submitted that in view thereof, the action undertaken by the respondent No.4 cannot be said to be erroneous.
Analysis:-
7. Having heard the learned advocates appearing for the Page 7 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined respective parties, it is not in dispute that the petitioner herein is the secured creditor of the subject property and in possession by order dated 30.04.2021 passed by the District Magistrate, Morbi, under Section 14 of the SARFAESI Act, 2002.
8. In light of the aforesaid, it is apposite to refer to Section 26E of the SARFAESI Act, 2002, which reads thus:
"Section 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."
9. Section 26E of the SARFAESI Act, 2002, as referred above, has an overriding effect on any other provision of any other law for the time being in force. The aforesaid section provides that the benefit of compliance of the provisions of Chapter IVA and declares that after the registration of security interest, the debts due to any secured creditor shall be paid in priority over;
(a) all other debts (b) revenues (c) cesses, and; (d) other rates, payable to the (i) Central Government; (ii) State Government, or (iii) any local authority. The section has carved out an exception to the common law principle that a sovereign debt has priority over all other private debts.
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10. At this stage, it is apposite to refer to the ratio laid down by the Hon'ble Division Bench in case of Mahadev Cotton Industries vs. Department of Central Sales Tax in Special Civil Application No.15391 of 2022, dated 18.01.2023. Relevant paragraph of the said decision reads thus:
"11.3 In the instant case, it is an undisputed fact that respondent No.5
- Bank is a secured creditor. Therefore, the Bank has valid first charge over the property in question by way of mortgage and has first right to sell the same in view of priority under Section 26E of the Act and recovered its dues from it. The petitioner is a bona fide purchaser, purchased the property in question from the e-auction held by the bank and paid full and total sale consideration to the bank and the bank has issued sale certificate in favour of the petitioner. Considering the law laid down by this Court as well as by the Hon'ble Apex Court and also keeping in mind the provisions of Section 26E of the SARFAESI Act, the debts due to financial institution / Bank - a secured creditor shall be paid in priority over other debts/taxes payable to the State Government. The petitioner has no concern with the dues of the State Authorities which is of the erstwhile owner. The petitioner has paid full and final sale consideration to respondent No.5 - Bank and if the State Authorities have dispute qua their dues, they can avail appropriate legal remedy before appropriate forum against the appropriate person/ s. Any of the respondent has no right to disturb the right, title and interest of the petitioner qua the property in question. 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 has priority to recover the dues against any charges of the State Government or Central Government, irrespective of the fact otherwise."
11. The Division Bench of this Court in case of Kalupur Commercial Co-operative Bank Ltd. vs. State of Gujarat, reported in 2020 (1) GLR 625, has observed 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 Page 9 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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.
(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 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 Page 10 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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 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 Page 11 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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 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 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;Page 12 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024
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(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 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 nonperforming 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;
(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;
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(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. 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 Page 14 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined the assent of the President on 27th August 1993. It came on 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 nonobstante 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 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 Page 15 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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).
[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 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.
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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 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 Page 17 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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 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 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 Page 18 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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 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."
12. The Hon'ble Supreme Court in the case of Dena Bank v.
Bhikhabhai Prabhudas Parekh & Company , reported in 2000 (5) SCC 694, has observed as under:
"8. The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well-recognized principle that the State is entitled to raise money by taxation because unless Page 19 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and it order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasizes the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues (see Builder Supply Corpn., AIR 1965 SC 1061). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of Article 372(1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the State's sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having received the available judicial pronouncements their Lordships have summed up the law as under :
1. There is consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts.
2. The common law doctrine about priority of Crown debts which was recognized by Indian High Courts prior to 1950 constitutes "law in force" within the meaning of Article 372(1) and continues to be in force.
3. The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues.
4. The doctrine may not apply in respect of debts due to the State if they are contracted by citizens in relation to commercial activities which may be undertaken by the State for achieving socio-economic good. In other words, where the welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic government functions of the State and seeks to recover debts from its debtors arising out of such commercial activities the applicability of the doctrine of priority shall be open for consideration.
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 Page 20 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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, (1832) 131 ER 563, it has been held that the Crown has no precedence over a pledgee of goods. In Bank of Bihar vs. State of Bihar, (1972) 3 SCC 196, the principle has been recognized 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."
13. The Hon'ble Supreme Court in the case of Punjab National Bank v. Union of India and others (Supra) , reported in 2022 (7) SCC 260, has observed in paragraphs 46 to 50 as under :-
"46. This Court in Dena Bank v. Bhikhabhai Prabhu Dass Parikh and another, [(2000) 5 SCC 694], wherein the question raised was whether the recovery of sales tax dues (amounting to Crown debt) shall have precedence over the right of the bank to proceed against the property of the borrowers mortgaged in favour of the bank, observed as under :-
"10. However, the Crowns preferential right of 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 of recovery of its debts over a mortgagee or pledgee of goods or a Secured Creditor."
(emphasis supplied)
47. Further, in Central Bank of India Vs. Siriguppa Sugars & Chemicals Ltd. & Ors. [(2007) 8 SCC 353], while adjudicating a similar matter, this Court has held as under :-
"18. Thus, going by the principles governing the matter, propounded by this Court there cannot be any doubt that the rights of the appellant - bank over the pawned sugar had precedence over the claims of the Cane Commissioner and that of the workmen. The High Court was, therefore, in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the Labour Commissioner for disbursal to the cane growers and to the employees. There is no dispute that the sugar was pledged with the appellant bank for securing a loan of the first respondent and the loan had not been repaid. The goods were forcibly taken possession of at the Page 21 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined instance of the revenue recovery authority from the custody of the pawnee, the appellant - bank. In view of the fact that the goods were validly pawned to the appellant bank, the rights of the appellant - bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods." (emphasis supplied)
48. The Bombay High Court in Krishna Lifestyle Technologies Ltd. Vs. Union of India & Ors. [2008 SCC Online Bombay 137], wherein the issue for consideration was "whether tax dues recoverable under the provisions of The Central Excise Act, 1944 have priority of claim over the claim of secured creditors under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002" held that :-
"19. Considering the language of Section 35 and the decided case law, in our opinion it would be of no effect, as the provisions of SARFAESI Act override the provisions of the Central Sales Tax Act and as such the priority given to a secured creditor would override Crown dues or the State dues.
20. In so far as the SARFAESI Act is concerned a Full Bench of the Madras High Court in UTI Bank Ltd. v. Deputy Commissioner of C. Excise, Chennai - II has examined the issue in depth. The Court was pleased to hold that tax dues under the Customs Act and Central Excise Act, do not have priority of claim over the dues of a secured creditor as there is no specific provision either in the Central Excise Act or the Customs Act giving those dues first charge, and that the claims of the secured creditors will prevail over the claims of the State. Considering the law declared by the Apex Court in the matter of priority of state debts as already discussed and the provision of Section 35 of SARFAESI Act we are in respectful agreement with the view taken by the Madras High Court." (emphasis supplied)
49. An SLP (No. 12462/2008) against the above judgement of the Bombay High Court stands dismissed by this Court on 17.07.2009 by relying upon the judgement in the matter of Union of India vs SICOM Ltd. & Anr. Reported in [(2009) 2 SCC 121], wherein the question involved was "Whether realization of the duty under the Central Excise Act will have priority over the secured debts in terms of the State Financial Corporation Act, 1951" and this Court held as under :-
"9. Generally, the rights of the crown to recover the debt would prevail over the right of a subject. Crown debt means the debts due to the State or the king; debts which a prerogative entitles the Crown to claim priority for before all other creditors. [See Advanced Law Lexicon by P. Ramanatha Aiyear (3rd Edn.) p. 1147]. Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to Page 22 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one. (emphasis supplied).
50. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the Appellant, on the second issue, hold merit. Evidently, prior to insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the Assessee or any person under the Act of 1944. Therefore, in the event like in the present case, where the land, building, plant machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to the provisions contained in Section 2(zc) to (zf) of SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI Act, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, Section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002."
14. The Hon'ble Apex Court in the case of Kotak Mahindra Bank Limited vs. Girnar Corrugators Pvt. Ltd., reported in 2023 (1) SCALE 456, more particularly in paragraph 9, has observed 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 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 Page 23 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 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."
15. The Division Bench of this Court in case of Kotak Mahindra Bank vs. M/s. Kailash Oil Cake Industries, in Special Civil Application No.22835 of 2022 , decision dated 08.02.2023, has observed as under:
"12. 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.
13. 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 first priority under Section 26E of the Act to recover its dues from it. In the present case, respondent No.11 has sent a communication dated 27.04.2022 to respondent No.12 - Revenue Authority concerned and thereby tried to affect the title of the property in question, which cannot be permitted. 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 by setting aside the entry mutated/recorded in the revenue record, as the petitioner is a secured creditor and the petitioner has legal and valid right to recover its dues first from the property in question. 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."
16. This Court in case of Madhaviben Jitendrabhai Rupareliya Page 24 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined vs. State of Gujarat in Special Civil Application No.9565 of 2023, decision dated 04.01.2024, has observed as under:
"3. All the petitioners in each of these petitions are the successful auction purchasers or their successors who have purchased the property by way of auction from the Bank or are subsequent purchasers from the auction purchaser and essentially, their grievance is about the fact that name in the revenue record are not mutated and are denied and, therefore, all these set of petitions are preferred with different prayers which are worded differently, but for the same purpose. Therefore, SCA No.12848 of 2023 is treated as lead petition and facts are stated from the said petition.
4. Similarly, Special Civil Application No.9565 of 2023 is preferred against the communication dated 21.3.2023 of Mamlatdar, Manavadar whereby Mamlatdar informed the petitioner that the petitioner's application for mutating her name in the revenue record cannot be accepted as there is a charge over the land of the petitioner in favour of Sales Tax Officer, Junagadh.
8.1 It is a well settled doctrine that the respective Banks which are Secured Creditors and are having charge over the subject property, their charge over the property would prevail over the Unsecured Creditor i.e. Sales Tax Department (Crown's Debt) and hence, the claim of Secured Creditor would prevail over the claim of Unsecured Creditor. According to the petitioner, in view of Section 26 E of the SARFAESI Act, this is the settled proposition of law and, therefore, all these petitions are covered by the aforesaid proposition of law.
8.2 That in case of Surendrabhai & Company and another v. State of Gujarat and others, 1985 GLH (U.J.) 53, this Court has held that the State cannot claim any right of preference in respect of its unsecured claim or a secured debt and to the extent of Section 137 of the Gujarat Land Revenue Code is declared to be void.
That this view was again confirmed by this Court in the case of Dahod Urban Cooperative Bank v. State of Gujarat in Special Civil Application No.3585 of 2008. Therefore, in view of this settled legal position, the petitioners have purchased the property in question by way of public auction as a bonafide purchaser from a Secured Creditor, the refusal of the respondents to mutate the name of the petitioners in the revenue entry in revenue record is contrary to law and hence, illegal.
8.3 That each of the petitioners are bonafide purchasers of the property in question and they have purchased the property by way of auction conducted under the provisions of law and more particularly, pursuant to the proceedings before the Debts Recovery Tribunal and, therefore, after having invested huge amount and after having succeeded in getting the Sales certificate, denial to mutate the name of the petitioners in the revenue records would amount to penalizing the petitioners.
Page 25 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined 8.4 From the catena of decisions of the Hon'ble Supreme Court as
well as this Court taking a view that the charge in favour of Secured Creditor would precede over the Unsecured Creditors (State in the instant case) and, therefore, the stand taken by the State Government is contrary to the settled proposition of law.
8.5 That the common law of England or principles of equity and good conscience would not allow Crowns Debt to have priority over the recovery of debts over the mortgagee or pledgee of goods or secured creditors and the aforesaid proposition of law is followed by the Hon'ble Supreme Court in the case of Bank of Bihar v. State of Bihar, 1972 (3) SCC 196, Dena Bank v. Bhikhabhai Prabhudas Parekh & Company, 2000 (5) SCC 694 and Punjab National Bank v. Union of India, 2022 (7) SCC 260.
8.6 That Sales Tax Department can always recover their dues from the defaulter through alternative forum and means, if any available, as per law, but the petitioners being bonafide purchasers cannot be permitted to be penalized.
17. In light of the position of law, as referred above and considering Section 26E of the SARFAESI Act, 2002, as also considering the undisputed facts, in the opinion of this Court, the charge of the secured creditor shall precede over the charge of the unsecured creditor. The petitioner herein being the secured creditor shall have priority over all the debts and revenues, taxes, cesses and other rates payable to the State Authorities.
18. In light of the aforesaid position of law and the undisputed facts, the prayers, as prayed for in the present petition, are required to be allowed and the same are allowed.
The impugned action of the respondent No.4 creating the Page 26 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024 NEUTRAL CITATION C/SCA/187/2024 JUDGMENT DATED: 06/08/2024 undefined charge on secured Assets of the petitioner bank, i.e. Non Agricultural Land bearing revenue survey no.51 paiki, of Village : Chardwa, Taluka : Halvad, District : Surendranagar, is quashed and set aside with a direction qua the respondent No.4 to remove the charge from the village form no.-8 of the Non- Agricultural Land bearing revenue survey no.51 paikki, of Village : Chardwa, Taluka : Halvad, District : Surendranagar, within a period of four weeks from the date of receipt of this order. Further, the respondent No.4 is directed to create the charge by entering the name of the petitioner herein in the village form No.8 with respect to the property-in-question.
19. For the foregoing reasons, the present petition is allowed. Rule is made absolute.
(VAIBHAVI D. NANAVATI,J) NEHA Page 27 of 27 Downloaded on : Fri Aug 16 22:16:20 IST 2024