Chattisgarh High Court
Chhattisgarh State Co-Operative ... vs Bank Of Baroda 52 Cra/1350/2015 Suresh ... on 10 January, 2020
Bench: P. R. Ramachandra Menon, Parth Prateem Sahu
1
AFR
HIGH COURT OF CHHATTISGARH, BILASPUR
Writ Appeal No. 330 of 2019
(Arising out of order dated 15.04.2019 passed in Writ Petition (C) No.2713 of
2018) by the learned Single Judge)
Chhattisgarh State Co-Operative Marketing Federation Limited, Through
The Managing Director, Chhattisgarh State Co-Operative Marketing
Federation Limited, 6th Floor, Tower C, Commercial Complex, C.B.D.
Sector 21, Atal Nagar, District Raipur Chhattisgarh. (Through In The
Impugned Judgment Old Address Is Mentioned)
---- Appellant
Versus
1. Bank of Baroda Through Its Branch Manager, Having Office At Civic
Centre, Bhilai Branch, Bhilai, District Durg Chhattisgarh.
2. State of Chhattisgarh, Through Its Secretary, Department of Revenue,
Mahanadi Bhawan, Atal Nagar, Nawa Raipur, District Raipur Chhattisgarh.
3. The District Collector, District Durg Chhattisgarh.
4. The Additional Tahsildar, Ahiwara, Tahsil Dhamdha, District Durg
Chhattisgarh.
5. M /s S.J. Rice Mills, A Proprietorship Firm, Through Its Proprietor Mala
Phally Joseph, Village Birebhat, Ahiwara, Tehsil Dhamdha, District Durg
Chhattisgarh.
---- Respondents
________________________________________________________________ For Appellant : Shri Ashish Surana, Advocate For Respondent No.1 : Shri Ankit Singhal, Advocate For Respondent/State : Shri Vikram Sharma, Deputy Government Advocate For Respondent No.5 : Shri J.K. Gupta, Advocate _________________________________________________________________ Hon'ble Shri P. R. Ramachandra Menon, Chief Justice Hon'ble Shri Parth Prateem Sahu, Judge Judgment on Board P.R. Ramachandra Menon, Chief Justice 10.01.2020
1. The verdict passed by the learned Single Judge in Writ Petition (C) No.2713 of 2018 filed by the Bank of Baroda (Secured Creditor) is put to test in this appeal preferred by Chhattisgarh State Co-operative Marketing Federation Limited (a Creditor) who was the 4 th Respondent in the writ 2 petition and it relates to the relative/preferential rights to proceed against the property of the 5th Respondent, who was the 'Borrower' from both the above establishments (Secured Creditor and Creditor).
2. The challenge involves mostly legal grounds, which may affect the very basis of the judgment with regard to rights declared in favour of the writ Petitioner-Bank, with regard to the relevant provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as 'SARFAESI Act').
3. Heard Shri Ashish Surana, the learned counsel for the Appellant, Shri Ankit Singhal, the learned counsel for the Respondent-Bank, Shri Vikram Sharma, the learned Deputy Government Advocate representing the State as well as Shri J.K. Gupta, the learned counsel for the 5th Respondent.
4. The judgment passed by the learned Single Judge, which is subjected to challenge, highlights the rights and liberties of the 'Secured Creditor' - Bank, to have preference/priority in getting the debts satisfied, over and above the rights of other creditors including the State by way of revenue or taxes, by virtue of the amendment brought about in the SARFAESI Act by introducing 'Section 26E' as per the Amendment Act 44 of 2016.
5. Before going to the legal aspects, a reference to the factual matrix is necessary to understand the nature of challenge and as to the course pursued by the learned Single Judge in finalising the matter. The sequence of events reveals that the 5th Respondent had borrowed some amounts from the 1st Respondent-Bank, creating security interest over various properties in the year 2013. It is also evident that the 5 th 3 Respondent was assigned the work of custom milling of paddy by the Appellant at different points of time and because of non-supply of the requisite quantity of rice after the custom milling, proceedings were taken against the 5th Respondent by the Appellant, in respect of the outstanding liability to be cleared under the said head. Since there was no positive efforts from the part of the 5 th Respondent, after completing the procedural formalities, the Appellant moved the State authorities for setting the machinery under the Revenue Recovery Act in motion, for realisation of the amount due to the Appellant. Pursuant to the requisition issued in this regard, a 'Revenue Recovery Certificate' was issued by the District Collector as borne by Annexure R-4/5 dated 20.08.2015. Based on the said certificate, further steps were pursued by the Tahsildar concerned, who notified the property for auction sale scheduled to be held on 24.08.2018. On that day, since nobody had turned up, the auction was adjourned as per notice dated 14.09.2018, informing the next date of auction on 26.09.2018.
6. While so, the 1st Respondent-Bank, from whom the loans were procured by the 5th Respondent had declared the assets as Non Performing Assets ('NPA') due to default of the Borrower in satisfying the dues/installments and initiated proceedings under the SARFAESI Act by issuing notice under Section 13(2) of the said Act. Meanwhile, the Bank came across the auction notice issued by the Revenue Authorities and on finding that such steps were detrimental to the rights and interest of the Secured Creditor- Bank, they chose to challenge the notice dated 14.09.2018, copy of which has been placed as Annexure P/1, by filing Writ Petition (C) No.2713 of 4 2018 with the following prayers :
"a. That this Hon'ble Court may kindly be pleased to pass an order, issue a direction or necessary command by way of writ of certiorari to quash and set aside the impugned auction notice dated 14.09.2018 issued by the Respondent No. 3(Annexure P-8) in the interest of justice; and b. This Hon'ble Court may kindly be pleased to pass any other or further orders deemed fit and necessary in the facts and circumstances in the matter."
7. The prayers were sought to be resisted from the part of the Respondents concerned, including the Appellant herein. The main contention raised by the Bank before the learned Single Judge was that, by virtue of Section 26E of the SARFAESI Act introduced with effect from 01.09.2016 as per Amendment Act 44 of 2016, the Bank was having priority among all debts even in respect of tax or revenue payable to the Government and in the said circumstances, the course sought to be pursued by the State/Revenue Authorities by causing the property to be sold in auction invoking the Revenue Recovery Act, 1890 (hereinafter referred to as 'RR Act') without any regard to the rights and interest of the Petitioner-Bank was liable to be interdicted.
8. The said writ petition, filed on 24.09.2018, came up for consideration on 26.09.2018, the date on which the auction sale was scheduled. The learned Single Judge passed an interim order on that day, to the effect that no third party right shall be created over the property in question. But the 5 fact remains that no bidder had turned up on that day as well and in the said circumstance, the auction did not take place.
9. The legal issue projected before the learned Single Judge was considered, also taking note of the position that the auction had not taken place on 26.09.2018, as nobody had turned up. Referring to the mandate of Section 26E of the SARFAESI Act, as extracted in paragraph-6 of the judgment, the learned Single Judge observed in paragraph-7 that the said provision had been brought into effect by the Government of India as per Gazette notification dated 01.09.2016, whereby the Central Government appointed '01.09.2016' as the date on which the provision shall come into force. In the said circumstance, it was held in paragraph-8 that no auction could be pursued against the interest of the Secured Creditor, by virtue of the 'non- obstante clause' in Section 26E. The learned Judge observed that, even tax, if any due to the State, had to yield to Section 26E of the SARFAESI Act and observed in paragraph-9 that the Bank shall have 'priority' and the 'first charge' to recover its dues in respect of the loan. It was held that the State cannot be allowed to act on the recovery notice dated 14.09.2018, simultaneously observing that after liquidation of the dues to the Bank, the State would be free to have charge over the remaining assets of the 5 th Respondent- firm. It was accordingly, that the matter was disposed of, correctness of which is put to challenge in this appeal.
10. It is brought to the notice of this Court by the learned counsel representing the State and also by the learned counsel appearing for the Bank that the Bank had filed necessary proceedings in terms of Section 14 of the 6 SARFAESI Act before the Magistrate having jurisdiction over the area and the said petition was allowed, so as to enable the Bank to take physical possession of the property, in respect of which symbolic question was taken much earlier. The learned counsel further submits that pursuant to the said order, which was never put to challenge by the Appellant or the 5 th Respondent, the physical possession was taken over and was given to the Bank. It is stated that further steps are being pursued by the Bank over the said properties, by virtue of their preferential rights in terms of the relevant provisions of the SARFAESI Act.
11. The basic question to be considered and answered by this Court is with regard to the challenge raised by the Appellant, contending that Section 26E of the SARFAESI Act has not come into force so far, as the same has not been notified by the Central Government in the Gazette. The other contention is that, the prayer of the writ Petitioner-Bank in the writ petition was only to set aside the auction notice dated 14.09.2018; whereas the 'Revenue Recovery Certificate' issued by the District Collector was never sought to be challenged. This being the position, the observation made by the learned Single Judge in paragraph-9 is liable to be interdicted.
12. The learned counsel for the Appellant submits that there is a fundamental difference between meaning of the word 'priority' and 'first charge'. The terminology used in Section 26E of the SARFAESI Act is only 'priority' and not 'first charge'. Reference is made to other similar provisions like Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (hereinafter referred to as 'RDB Act'), where again, it has been mentioned as 'priority' 7 and not 'first charge'. Distinction is sought to be drawn with reference to the law declared by the Apex Court in the matter of Central Bank of India v. State of Kerala and Another, (2009) 4 SCC 94.
13. The learned counsel for the Appellant submits that there is no dispute, by virtue of statutory provisions, that the secured creditor may be having 'priority' in the matter of discharging of debts over the debts of other creditors. But here, since the word used is not 'first charge', it is possible for the State Government to proceed with further steps for recovery, invoking the machinery under the RR Act and once that is done, the interest of the Bank has to be protected by satisfying the amount due to the Bank giving priority and the balance can be appropriated or given to the other creditors in accordance with law. In other words, since the word used is only 'priority', there is no bar in pursuing simultaneous proceedings, notwithstanding the steps being pursued by the Bank in terms of either the RDB Act or the SARFAESI Act. This is more so since, according to the Appellant, the Bank, for its own reasons, may not be initiating appropriate steps under any of the said enactments to secure their rights in a given case, and still be giving time to the defaulter or may be keeping the proceedings in cold storage for such other reason. Hence it may not be correct to say that since 'priority' has been conferred on the Bank as per the statute, the other creditors will have to wait till the Bank takes appropriate decision to proceed against the defaulter. The right of the other creditors to proceed against the defaulter, by virtue of the separate cause of action, cannot be stalled because of the priority rights of the Bank under the above statute. According to the counsel, it can only be 8 ensured that, when the State Government/other Creditors are proceeding with further steps, deploying the machinery under the RR Act or such other measures, the priority right of the Bank has to be protected at the first instance and the balance, if any, can be given for distribution among the other creditors based on their relative rights. That apart, the machinery of the State may be more effective to proceed against all the assets of the defaulter.
14. With regard to the facts and events, there is no dispute. The auction did not take place on the date when it was scheduled. The property, pursuant to the order passed by the competent Magistrate in terms of Section 14 of the SARFAESI Act, has already been handed over to the Bank. The pertinent question is with regard to application of 'Section 26E' of the SARFAESI Act. The said provision reads as follows :
"26E. Priority to secured creditors.-
Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Explanation.- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in case where insolvency or bankruptcy proceedings are pending in respect of secured assets of the 9 borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
15. As mentioned already, the primary contention raised by the Appellant is that the above provision has not come into effect. The next contention is that it cannot have retrospective effect, having allegedly brought into effect only from 01.09.2016; whereas the 'Revenue Recovery Certificate' was issued by the District Collector much prior to that date i.e. on 20.08.2015.
16. The question of retrospectivity/prospectivity is to be considered at the first instance. The wording given in the said provision is quite categoric. Section 26E starts with a 'non-obstante clause'; by virtue of which, it lets down all other provisions of law/enactments. The provision says that after registration of security interest, the debts due to any 'secured creditor' gets priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. The registration of security interest takes place when the property offered as security for granting the loan and necessary papers are executed creating mortgage. This, in the instant case, has taken place way back in the year 2013. The provision (Section 26E) does not say that, it will not be applicable in respect of cases where the recovery proceedings have been initiated by the State, Central Government, the Local Authority or other Creditors. Since the terminology used is with reference to registration of the security interest, it is virtually to the effect that, once security interest is created, whatever may be the steps taken in the meantime, the 'payment' cannot be effected in respect of debts to the other creditors, ignoring the 10 priority of the Bank/secured creditor. In other words, the provision (Section 26E) may not be applicable in the case of payment already effected pursuant to such steps by the State Government on request of other creditors as that clock cannot put back to 'zero' to start afresh. Unlike this, even in a case where the Bank has not taken any steps under the SARFAESI Act in respect of the security interest created much earlier and even if, the State has initiated the recovery proceedings invoking the machinery under the RR Act, later, if steps are taken by the Bank, projecting their claim, then the 'payment' cannot be effected to any others ignoring the 'priority' by the secured creditor. This being the position, the contention raised by the Appellant that Section 26E of the SARFAESI Act is prospective and hence, not applicable to the case in hand, since the 'Revenue Recovery Certificate' was issued prior to introduction of Section 26E does not hold any water and it stands repelled.
17. Coming to the applicability of Section 26E of the SARFAESI Act, the learned counsel for the Appellant submits with all force that the said Section has not been notified in the Official Gazette and the observation made by the learned Single Judge to the effect that it has come into effect from '01.09.2016' is not correct. Various judgments have been referred to during the course of hearing by both the sides, as rendered by the Full Bench of the Madras High Court (Assistant Commissioner (CT) Anna Salai-III Assessment Circle, Chennai v. Indian Overseas Bank, Chennai & Anr reported in AIR 2017 Madras 67 FB), Division Bench of the Andhra Pradesh High Court (Dist. Manager, Mahabubnagar Dist v. Authorised Officer, Mahabubnagar Dist & 5 Others reported in 2017 11 SCC Online Hyd 252) and Division Bench of Bombay High Court (Axis Bank Limited v. State of Maharashtra & Another reported in 2017 SCC Online Bom 274), wherein observation has been made to the effect that Section 26E has been brought into effect from '01.09.2016'.
18. As a matter of fact, we have travelled quite long, to collect the particulars of all notifications from our Library and such other sources. In fact, three separate notifications have been issued, pursuant to amendment of the various provisions of the SARFAESI Act as per Act 44 of 16. Section 26E was sought to be inserted as per Section 18 of the Amendment Act, 2016. Different provisions of the Amendment Act were notified to be effective from different dates, as per the above three notifications. The first notification No. S.O. 2831 (E) dated 01.09.2016 clearly says Sections 2, 3, 4 [except clause (xiii)], 5, 6, 8 to 16, and 22 to 25 came into force on 01.09.2016. Clause (xiii) of Section 4 and Section 7 came into force as per notification No. S.O. 3395 (E) dated 04.11.2016 and the third notification No. S.O. 176 (E) dated 18.01.2017 gave breath to Section 20 and 21 to be in force from 18.01.2017.
19. With regard to Section 17 (dealing with application against measures to recover secured debts), Section 18 (dealing with Section 26E) and Section 19 (dealing with right of borrower to receive compensation and costs in certain cases), no notification is stated as issued or brought to our notice. As such, we find it difficult to persuade ourselves, despite our best efforts, to concur with the views expressed by the Division Bench of Andhra Pradesh High Court, Bombay High Court; the Full Bench of the Madras 12 High Court and also that of a Single Bench of this High Court, to hold that Section 26E has been brought into effect from 01.09.2016.
20. At the same time, we are aware that a similar provision was sought to be incorporated by the Central Government by way of 'Section 31B' of the RDB Act. The said provision was incorporated by Amendment Act 44 of 2016 with effect from 01.09.2016, which is more or less similar, insofar the terminology used in Section 26E of the SARFAESI Act is concerned. Section 31B of the RDB Act reads as follows :
"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 case where insolvency or bankruptcy proceedings are pending respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
21. The Central Government consciously issued a notification bringing the above provisions declaring the priority rights by way of notification dated 13 01.09.2016 bearing No. S.O. 2831 (E), in the statute book and as such, priority of the secured creditors are declared and notified insofar as RDB Act is concerned. Whether non-issuance of notification in respect of Section 26E of the SARFAESI Act, as dealt with Section 18 of the Amendment Act 44 of 2016, was a conscious decision or whether it was an inadvertent omission, lingered in our minds, which persuaded us to probe further. Ultimately, it has been noted that the Central Government has now issued a notification bearing No. S.O. 4619/E dated 26.12.2019, published in the Gazette of India dated 26.12.2019 to the effect that Sections 17 to 19 of the SARFAESI Act (Act 44 of 2016) will come into force from 24.01.2020. Thus, it is explicitly clear that Section 26E of the SARFAESI Act was never brought into force on 01.09.2016 and it is being brought into force only with effect from 24.01.2020 (it being the amendment dealt with under Section 18 of the Amendment Act 44 of 2016).
22. In the above circumstances, we find that the ruling rendered by the learned Single Judge, observing in paragraph-7 that Section 26E of the SARFAESI Act has already come into effect from '01.09.2016' is a factual mistake. This being the position, the finding given with reference to the said provision and the further declaration/observation in 'paragraph-9' are declared as not correct or sustainable and hence, it is set aside.
23. However, in view of the fact that the auction did not take place on 26.09.2018 and the Bank has already obtained physical possession of the property, pursuant to the order passed by the Magistrate concerned, in 14 terms of Section 14 of the SARFAESI Act, it is quite open for the Bank to take appropriate steps in accordance with law.
24. With regard to the submission made with reference to the distinction between meaning of the term 'priority' and 'first charge', it is not a subject matter, insofar as the present case is concerned. Further, the prayer in the writ petition was only to cause the auction notice dated 14.09.2018 to be set aside. We leave the said question open, to be considered at appropriate time, in appropriate case.
25. The writ appeal stands allowed to the said extent. No costs.
Sd/- Sd/-
(P.R. Ramachandra Menon) (Parth Prateem Sahu)
Chief Justice Judge
Anu