Gujarat High Court
Bank Of Baroda vs State Of Gujarat on 8 October, 2024
Author: Vaibhavi D. Nanavati
Bench: Vaibhavi D. Nanavati
NEUTRAL CITATION
C/SCA/11037/2023 ORDER DATED: 08/10/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 11037 of 2023
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BANK OF BARODA
Versus
STATE OF GUJARAT & ORS.
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Appearance:
MR CZ SANKHLA(3243) for the Petitioner(s) No. 1
MS NIDHI VYAS, AGP for the Respondent(s) No. 1,2,3
NOTICE SERVED for the Respondent(s) No. 4
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CORAM:HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
Date : 08/10/2024
ORAL ORDER
1. Heard Mr. C. Z. Sankhla, the learned advocate appearing for the petitioner and Ms. Nidhi Vyas, the learned AGP appearing for the respondent - State.
2. Mr. Sankhla, the learned advocate has placed on record the draft amendment dated 8.10.2024. The same is taken on record and allowed. To be carried out forthwith.
3. The petitioner herein is constrained to approach this Court under Article 226 of the Constitution of India being aggrieved by the impugned Attachment Letter/Order dated Page 1 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 1.7.2022 with a direction that the charge recorded in the revenue record in favour of the respondent No.2 vide Mutation Entry No.8926 dated 1.1.2021 vide Annexure-F (page-120) be removed/deleted and has prayed for the following reliefs:-
"The Petitioner proposes following amendments in the present Petition as under: -
(A) The Petitioner propose to incorporate/add Para 33(A) as under :-
33(A). This Hon'ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, order or direction by quashing and setting aside the impugned attachment Letter/ Order dated 01/07/2022 with direction that the charge with a direction recorded in the revenue record in favour of respondent no.2 vide Mutation Entry no.8926 dated 01/01/2021 vide ANNEXURE- "F" be removed/deleted for the reasons stated in the Memo of Petition and in the interest of justice;
(A) This Hon'ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, order or direction by quashing and setting aside the impugned attachment Letter/Order dated 01/07/2020 with a direction that the charge recorded in the revenue Page 2 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined record in favour of respondent no.2 vide Mutation Entry No.8926 dated 01/01/2021 vide ANNEXURE-"F" be removed/ deleted for the reasons stated in the Memo of Petition and in the interest of justice;
(B) This Hon'ble Court may be pleased to hold that the Petitioner have first charge over the properties mortgaged by the Respondent No. 4 under section 26E of the SARFAESI Act, which would override the charge of the Respondent no.2 under Section 48 of the VAT Act.
(C) Pending admission, hearing and final disposal of this Special Civil Application, Your Lordships may be pleased to restrain the respondent no. 2 from taking any further steps in relation to the property mortgaged by the Respondent No. 4 as security with the petitioner bank, and in view of the provisions under Section 26-E of the SARFAESI Act, 2002 coupled with the fact that the petitioner is in possession of the property in question from 02/11/2019, and has handover the said property to the Auction Purchaser, and for the reasons stated in the Memo of Petition and in the interest of justice;
(E) This Hon'ble Court may be pleased to hold that the Respondent no.2 cannot proceed against the said property which has been lawfully sold and possession handed over to the purchase under the SARFAESI Act.Page 3 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined (F) The Hon'ble Court may kindly be pleased to grant such other and further relief(s) as deemed fit in the facts and circumstances of the case and in the interest of justice;"
4. Heard Mr. C. Z. Sankhla, the learned advocate appearing for the petitioner.
4.1 It is submitted that the respondent No.4 herein approached the petitioner Bank requesting the petitioner Bank to sanction Credit Facilities to run/expand its business activities. The said request was considered by the Petitioner Bank favorably having sanctioned Cash Credit (Hypothecation of Stock and Book Debts) of Rs.120.00 Lakhs and Term Loan of Rs.34.67 Lakhs aggregating to Rs.154.67 Lakhs in the year 2016, which were duly availed by the respondent No. 4 upon execution of Security Documents dated 11.02.2016.
4.2 It is submitted that, the petitioner Bank accordingly created mortgage over the respective properties and among others, one property belonged to respondent No. 4 being the Page 4 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined borrower cum mortgagor namely Mohanlal Vrajlal Gamot bearing Plot No.1, Revenue Survey No. 434 Paiki adm. About 398.87 sq.mtrs., Anjar City Survey office North Division Sheet no.84, City Survey No. 336o/ 1/1 Municipal Ward no.2 situate lying and being at Mouje Village Anjar Taluka Anjar District Kutch on 11/02/2016 which was registered with Sub Registrar office at Anjar under Registration No. 964. Reliance is placed on the said mortgage deed which is duly produced at Annexure-A. 4.3 It is submitted that the charge of the Bank was registered with City Survey Office by way of Mutation entry no.6464 dated 09.05.2016. It is submitted that, the respondent No.4 defaulted in repayment of the aforesaid credit facility and the petitioner Bank classified the said account as NPA (Non Performing Asset) on 29.07.2019, in accordance with the Reserve Bank of India directives and guidelines.
4.4 It is submitted that in spite of the Bank's repeated requests and reminders, the borrower failed to repay the dues Page 5 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined of the Petitioner Bank. The petitioner bank initiated action under Section 13(2) of the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by issuing Demand Notice on 2.8.2019 to the Borrowers/ Mortgager/Guarantor.
4.5 The respondent No.4 did not pay the dues to the Petitioner Bank, and in view thereof the Petitioner Bank taken possession of the said property on 02.11.2019 and same was published on 07.11.2019 in two Newspapers as per rules in respect thereof.
4.6 It is submitted that secured assets were put to public auction Auction under the SARFAESI Act, however the said Public Auctions remained unsuccessful. Lastly the Petitioner Bank as secured creditor issued sale notice dated 01.04.2022, which was also published in two leading newspapers wide circulation in the locality.Page 6 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 4.7 It is submitted that the petitioner bank is making efforts to effect sale of the said property, since 2019, however the respondent authorities being respondent no.1 and 2 never objected to the same and their charge over the mortgage property was registered with the office of the Sub Registrar in 1.1.2021 whereas the mortgage in favour of the petitioner bank was created and registered on 11.02.2016 as per the Annexure A where CERSAI Registration is registered under A1. Even otherwise, the charge of the mortgage in favour of the petitioner bank is pre-dated in which case the same would be give precedence to the secured creditor as provided under Section 26E of the Act 2002.
4.8 It is submitted that, petitioner Bank declared the E auction on 19.04.2022 by giving public notice on 01.04.2022.
In response to the said Auction Notice (1) Mr. Gudrasaniya Sanjay Shantilal (2) Mrs. Heena Sanjay Gudrasaniya (3) Mr. Gudrasaniya Pradeep Shanatilal (4) Mr. Malsatar Pareshkumar Danjibhai (5) Mr. Malsatar Mital Pareshkumar (6) Mr. Maltasar Page 7 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined Dilip Danjibhai (7) Mr. Hadiya Paresh Shantilal (8) Mrs. Hadiya Heena Parekh participated in the auction who were jointly declared as successful bidder in the said auction dated 19.04.2022, who offered consideration of Rs.26.65 Lakhs towards purchase of said Property. Upon receipt of above referred amount from the Auction Purchaser, petitioner Bank issued the Sale Certificate on 07/05/2022 in their favour and also handed over the physical possession of the said property to them on 07.05.2022. The Sale Certificate dated 07.05.2022 issued by Authorized Officer of the Petitioner Bank is duly produced Annexure E. 4.9 The Auction Purchaser requested for registration of the sale certificate, therefore, the Petitioner Bank and Auction Purchaser approach the office of the respondent no.3 for registration of the sale certificate, however, the respondent no.3 declined to register Sale Certificate/ Sale Deed in favour of the Auction Purchaser vide letter dated 01.07.2022 and asked to produce the NOC letter of the respondent no.2 only Page 8 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined when the registration without encumbrance and title clear can be done in view of the charge registered by the respondent no.2 under mutation entry No.8926 dated 01.01.2021. The said letter is duly produced at Annexure-F and G respectively.
4.10 Reliance is placed on Section 26E of the SARFAESI Act, 2002 and it is submitted that Section 26E provides that notwithstanding anything contained in any other law for the time being in force, after the registration of the 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 the State Government or the local authority. Placing reliance on the aforesaid, it is submitted that the issue-in-question is no longer res-integra.
4.11 Reliance is also 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 Page 9 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 the aforesaid issue was also considered in Special Civil Application No.9565 of 2023.
4.12 Placing reliance on the aforesaid submissions, Mr. Sankhla, the learned advocate submitted that for the foregoing reasons the prayers as prayed for in the present petition are required to be allowed.
5. Ms. Nidhi Vyas, the learned AGP appearing for the Page 10 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined respondent - State places reliance on the affidavit-in-reply which is duly produced at page-124 and submitted that the petitioner herein has preferred an Appeal challenging the said order and in view thereof the attachment letter/order dated 1.7.2022 whereby the charge is recorded in favour of the respondent No.2 vide Mutation Entry No.8926 dated 1.1.2021.
5.1 It is submitted that in view thereof the petitioner may not be permitted to avail parallel remedies, one by filing petition before this Court as also preferring an Appeal. It is submitted that the petitioner herein is having first charge over the property in question and the same cannot be preceded against the said property in question which is lawfully sold by the petitioner Bank under the SARFAESI Act.
5.2 Placing reliance on the aforesaid submissions, it is submitted that the prayers as prayed for in the present petition may not be entertained.Page 11 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
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6. Mr. Sankhla, the learned advocate appearing for the petitioner in rejoinder submits that the said Appeal which is placed on record at page-187 stands withdrawn on 4.1.2024.
7. Having heard the learned advocates appearing for the respective parties, it is not in dispute that the petitioner herein is having charge over Plot bearing No.1, Revenue Survey No.434 Paiki admeasuring about 398.87 sq.mtrs., Anjar city, Survey Office North Division Sheet No.84, City Survey No.3360/1/1 Municipal Ward No.2 at Mouje Village : Anjar, Taluka : Anjar Dist. Kutch since 9.5.2016 having registered the charge with the Sub Registrar Office at Anjar under Registration No.964. The charge of the respondent No.2 is registered under the Mutation Entry No.8926 on 1.1.2021 which is at a later point of time.
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 Page 12 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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.
In the facts of the present case, the petitioner herein sold the aforesaid property in question to the respondent No.4 herein by following due procedure under the SARFAESI Act, Page 13 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 2002 issued the Sale Certificate to the private respondent on 7.5.2022. It is only when the petitioner and the auction purchaser approached the office of the Sub Registrar and the Sub Registrar declined to register the Sale Certificate / Sale Deed, the petitioner herein came to know that the respondent No.2 has registered charge over the subject property by Mutation Entry No.8926 dated 1.1.2021.
Position of law:-
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 Page 14 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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."
10.1 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 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 Page 15 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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.Page 16 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
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(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 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 Page 17 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 Page 18 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined or any instrument having effect by virtue of any such law."
"37. Application of other laws not barred.-The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force."
13. The statement of objects and reasons for the two 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.Page 19 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 longterm 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 20 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 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 Page 21 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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;
(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 Page 22 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 Page 23 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined utilization and recycling of the funds for the development of the country. The Bill seeks to provide for the establishment of Tribunal and Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. Notes on clauses explain in detail the provisions of the Bill.
ACT 51 OF 1993 The Recovery of Debts Due to Banks and Financial Institutions Bill having been passed by both the Houses of Parliament received the assent of the President on 27th August 1993. It came on 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 Page 24 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 Page 25 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined New Delhi, the 1st September, 2016 S.O. 2831 (E).--In exercise of the powers conferred by subsection (2) of section 1 of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016), the Central Government hereby appoints the 1st day of September, 2016 as the date on which the following provisions of the said Act shall come into force, namely :-
Sr. No. Sections 1 Sections 2 and 3 (both inclusive);
2 Sections 4 [except clause (xiii)]; 3 Section 5 and 6 (both inclusive);
4 Sections 8 to 16 (both inclusive);
5 Sections 22 to 31 (both inclusive); 6 Sections 33 to 44 (both inclusive).
[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 Page 26 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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. 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 Page 27 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 Page 28 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined was declared a defaulter, Income-tax department would not have priority over all debts owned by defaulter member. The first thing to be noticed is that the Income Tax Act does not provide for any paramountancy of dues by way of income tax. This is why the Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2005] 5 SCC 694 (para 19) held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles v. Grover (1832) (131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods. In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad v. Central Bank of India [1967] 3 SCR 855 after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore "law in force" in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862). In the present case, as has been noted above, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues.
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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.
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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 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 Page 31 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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."
Page 32 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 10.2 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 Page 33 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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 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.Page 34 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined
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 the common law principle. A Page 35 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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."Page 36 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 10.3 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 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."Page 37 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024
NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 10.4 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 Page 38 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined 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."
10.5 The Division Bench of this Court in case of State of Gujarat & Anr. V/s. PRA Realities LLP & Anr., in Civil Application (for Condonation of Delay) No.1712 of 2024 in Letters Patent Appeal No.7431 of 2024, decision dated 02.04.2024, paragraphs 5 to 9 has observed as under:
"5. Taking note of the provisions of Section 26E read with Section 13(7) of the SARFAESI Act, 2002, we may note that with non-obstante Clause, under Section 26E, priority has been given to the secured creditors wherein the proceedings have been initiated by the secured creditor for recovery of its debt in accordance with the provisions of Section 13 to 16 contained in Chapter III for enforcement of security interest. Sub-section (7) of Section 13 provides that where any action is taken against the borrower under Sub-section (4) of Section 13, the money received by the secured creditor Page 39 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined from the sale of secured asset is held by him in trust and has to be applied, (i) firstly in payment of costs charges and expenses incurred in taking action against the borrower under the provisions of Sub-section (4) and (ii) secondly in discharge of dues of secured creditor. It further provides that residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. Section 26E further starts with non-obstante clause and provides that 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.
6. Section 26D of the SARFAESI Act, 2002 further provides that from the date of commencement of provisions of Chapter IV, no secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the central registry, created under Section 20 contained in Chapter IV.
7. A conjoint reading of Sub-section (7) of Section 13 and Section 26D, Section 26E makes it clear that the appellants cannot claim preference over the dues of the secured creditor, which was realised by auction sale of the secured asset in the proceedings initiated under the SARFAESI Page 40 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined Act, 2002. Moreover, till date no proceedings for recovery of the dues towards VAT has been initiated by the appellants herein namely the office of the Assistant VAT Commissioner, Ahmedabad. Mere Entry in the revenue records creating charge over the property would not amount to any encumbrance on the immovable property, which has been sold in the public auction, more so when there is no attachment order of the property-in-question.
8. In view of the above, no infirmity is found in the order passed by the learned single Judge. The Letters Patent Appeal is dismissed.
9. It is, however, clarified that the dismissal of the instant appeal or the decision of the learned single Judge in allowing the writ petition will not come in the way of the appellants in making recovery of its dues by initiating appropriate proceedings of recovery strictly in accordance with law."
11. Considering undisputed facts of the present case and in light of the position of law, as referred above and considering Section 26E of the SARFAESI Act, 2002, in the opinion of this Court, the charge of the petitioner - Bank shall precede over the charge of the State with respect to the subject property.
The petitioner - Bank being the secured creditor shall have Page 41 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024 NEUTRAL CITATION C/SCA/11037/2023 ORDER DATED: 08/10/2024 undefined priority over all the debts and revenues, taxes, cesses and other rates payable to the State Authorities. Upon perusal of the page-187 Appeal being Appeal No.RRP/Katch/118/2023 challenging the attachment dated 1.1.2021 has been withdrawn on 4.1.2024.
12. For the reasons stated above, this is a fit case to exercise extra-ordinary jurisdiction under Article 226 of the Constitution of India. The prayers, as prayed for, in the present petition are required to be allowed and the same are allowed. The impugned attachment order dated 1.7.2022 is quashed and set aside, the charge recorded in the revenue record in favour of the respondent No.2 vide Mutation Entry No.8926 dated 1.1.2021 is directed to be removed/deleted.
Liberty is served in favour of the respondent - State to take appropriate steps in accordance with law.
13. The present petition stands allowed accordingly.
(VAIBHAVI D. NANAVATI,J) K.K. SAIYED Page 42 of 42 Uploaded by K.K. SAIYED(HC00169) on Wed Oct 30 2024 Downloaded on : Sat Nov 02 21:40:56 IST 2024