24 Dec 2021

Union Bank of India Vs. State of Maharashtra & Ors. - After the registration of security interest under SARFAESI, 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.

High Court of Bombay (17.12.2021) in Union Bank of India Vs. State of Maharashtra & Ors. [Writ Petition No. 1025 of 2018] held that;

  • Section 26-E (SARFAESI)provides for priority in favour of the secured creditors. One of the important conditions to exercise this right of priority is that the security interest must be registered with the authority.

  • That on harmonious reading of Section 26-E of the SARFAESI Act and Section 37 of the MVAT Act it would be clear that the secured creditor would have a first charge over an asset and the charge created in favour of the State of Maharashtra under Section 37 of the MVAT Act would be subject to the first charge created by the Central Legislation namely, Section 26-E of the SARFAESI Act.

 

‘‘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.

 

Excerpts of the Order;

# 1. Rule. Rule made returnable forthwith. Heard finally with the consent of the learned Advocates for the parties.

 

# 2. It is the case of the petitioner that the respondent No.4 had initially applied for the facility of cash credit limit and Inland Letter of Credit limit to the extent of Rs.10 crores (Rs.Ten Crores only). The petitioner – Bank had sanctioned and granted the said credit facilities to the respondent No.4 and accordingly disbursed the said limits to the respondent No.4. Thereafter, on the request of respondent Nos.4 to 6, the aforesaid credit facilities were enhanced and renewed from time to time and lastly, it was enhanced to the extent of Rs.55 crores (Rs. Fifty Five Crores only). The aforesaid credit facilities granted to respondent No.4 were secured by mortgage of the immovable property of the respondent Nos.4, 5 and 6. The respondent Nos.4 to 6 and other guarantors and mortgagors failed to clear the outstanding loan and failed to operate the loan account as agreed. The loan accounts of respondent No.4 were declared as Non-Performing Assets (NPA). The petitioner-Bank issued notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short ‘SARFAESI Act’) and called upon the respondent Nos.4 to 6 to pay the outstanding amount of Rs.59,11,28,808.59 within sixty days. The respondent Nos.4 to 6 did not comply the notice. The petitioner – Bank, therefore, under Section 13(2) of the SARFAESI Act issued notice to take possession of the said assets on 31/03/2014. On failure of the respondent Nos.4 to 6 to deliver possession of the secured assets, the petitioner- Bank made an application to the District Magistrate, Nagpur under Section 14 of the SARFAESI Act and which came to be allowed on 31/07/2015.

 

# 3. The respondent No.2 by a letter dated 19/06/2014 informed the petitioner -Bank that they have already issued notice under Section 38(1) of the Maharashtra Value Added Tax Act, 2002 (for short ‘MVAT Act’) to the respondent Nos.4 to 6 for recovery of sales tax dues outstanding against them and also informed the petitioner – Bank that the Sales Tax Department is having first charge over the properties in terms of Section 37 of the MVAT Act. The respondent No.2 directed the petitioner – Bank not to proceed further to obtain possession and dispose of the properties without their consent. The petitioner – Bank informed the respondent Nos.2 and 3 that the petitioner – Bank has already initiated action under SARFAESI Act for recovery of outstanding amount of Rs.59,11,28,808.59 against the respondent Nos.4 to 6. The petitioner- Bank specifically informed the respondent Nos.2 and 3 that under the law, petitioner – Bank is having first charge over the secured assets since the respondent Nos.4 to 6 had mortgaged their property with the petitioner- Bank prior to action initiated by the respondent Nos.2 and 3. It is stated that despite this information, the respondent Nos.2 and 3 proceeded ahead to auction the property viz; the secured assets of respondent Nos.4 to 6. The respondent Nos.5 and 6 challenged the action initiated by the petitioner – Bank by filing a petition in this Court. The petition was dismissed. It is stated that in order to put hurdles in the process of taking possession of the secured assets by the petitioner- Bank, the respondent Nos.5 and 6 also prepared bogus documents. The action of respondent Nos.2 and 3 to attach the properties which are the secured assets of the petitioner – Bank is illegal and also in violation of principles of natural justice. On these averments, the petitioner – Bank has prayed to quash and set aside the action of attachment and creating charge over the secured assets by the respondent Nos.2 and 3 and also, the order of attachment dated 31/10/2017.

 

# 4. The respondent No. 2 opposed the petition inter alia contending that there is no substance in the petition. The petitioner-Bank has tried to defeat the right of the respondent Nos.2 and 3. There is no bar for attachment of the property, by the Department, which is mortgaged with the petitioner-Bank. The action on the part of the petitioner- Bank is not diligent. The action initiated by the respondent Nos. 2 and 3 was prior to the coming into force of Section 26-E of the SARFAESI Act and Section 31-B of the Recovery of Debts and Bankruptcy Act, 2002 (for short ‘RDB Act’). The attachment of the property by the respondent Nos. 2 and 3 was set aside in the Writ Petition No. 1612 of 2016. However, the subsequent attachment has been made under Section 44(6) of the Maharashtra Value Added Tax Act, 2002 (for short ‘MVAT Act’). The State Government has a priority over the property attached in this case.

 

# 5. Heard the learned Advocate for the petitioner- Bank and the learned Advocate for the respondent Nos. 1 to 3. Perused the record and proceedings.

 

# 6. Section 26-E of the SARFAESI Act was amended by a Central Legislation vide Act No. 44 of 2016 with effect from 01/09/2016. Section 26-E of the SARFAESI Act has a bearing with the controversy involved in this petition and therefore, the same is reproduced here. It reads thus :

  • ‘‘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.”

 

# 7. Similarly, Section 37 of the MVAT Act is also relevant. This Act came into force on 01/04/2005. Section 37 reads thus :

  • “37. Liability under this Act to be the first charge-Notwithstanding anything contained in any contract to the contrary, but subject to any provision regarding creation of first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person.”

 

3 8. The respondent Nos. 2 and 3 are heavily relying upon the provisions of Section 37 of the MVAT Act. Perusal of Section 26-E would show that it begins with non obstante clause. Similarly, Section 37 of the MVAT Act also begins with non obstante clause. The petitioner- Bank is relying upon Section 26-E of the SARFAESI Act and the respondent No.2 is relying upon Section 37 of the MVAT Act to justify their respective actions. In our view, though Section 37 begins with a non obstante clause, it would be subject to any provisions of the Central Act dealing with the issue in question. In our view, therefore, the contention of the respondent Nos. 2 and 3 based on Section 37 of the MVAT Act cannot be sustained. In this case the provisions of Section 26-E of the SARFAESI Act would be applicable.

 

# 9. It is the case of the respondents that the process for attachment of the property in question was initiated by the respondent Nos. 2 and 3 prior to the coming into force of Section 26-E of the SARFAESI Act and therefore, the claim of the respondent No. 2 to auction the property would get priority and preference. It is true that the proceeding was initiated by the respondent Nos. 2 and 3 prior to year 2016. However, the action in question was set aside. The second proceeding has been commenced after coming into force of Section 26-E of the SARFAESI Act. It is further pertinent to mention that the attachment order was issued by the respondent No. 3 on 31/10/2017. Admittedly, the order of attachment was passed after coming into force of Section 26-E of the SARFAESI Act with effect from 01/09/2016. The petitioner- Bank has also initiated the process for the attachment and auction of the mortgaged property. The said process as can be seen from the record to the extent of the two properties mortgaged with the petitioner- bank has been stalled due to the order dated 31/10/2017 issued by the respondent No. 3. The question is whether such action can be sustained in view of the provisions of Section 26-E of the SARFAESI Act. Section 26-E provides for priority in favour of the secured creditors. One of the important conditions to exercise this right of priority is that the security interest must be registered with the authority. Perusal of the record would show that on 30/03/2012 the security interest was registered with the central Registry of the Securitisation Asset Reconstruction and Security interest of India by petitioner-Bank. There are two separate registration documents for two separate properties. It is therefore seen that this important requirement of Section 26-E of the SARFAESI Act has been fulfilled by the petitioner-Bank. The issue with regard to the priority of a secured creditors with regard to the secured assets over the priority of all other debts and Government dues has been considered in following decisions.

  • 1] Edelweiss Asset Construction Co. Ltd. .v/s. Tax Recovery Officer, Mumbai and oths., Writ Petition No. 7964 of 2021 decided on 28/07/2021 (unreported).

  • 2] State Bank of India .v/s. The State of Maharashtra and oths., Writ Petition (st.) No. 92816 of 2020, decided on 17/12/2020 (unreported).

  • 3] The Cosmos Co-operative Bank .v/s. The State of Maharashtra and ors., Writ Petition No.3820 of 2018, decided on 13/11/2019 (unreported).

 

# 10. In these decisions (supra) it is held that after coming into force of Section 26-E of the SARFAESI Act with effect from 01/09/2016, the right of the secured creditors to realise the secured dues and debts, which are payable to the secured creditors, by sale of assets, over which security interest has been created, shall have priority over other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. In the case of the Cosmos Co-operative Bank .v/s. State of Maharashtra and other (supra), the Division Bench of this Court at the Principal seat at Bombay has held that on harmonious reading of Section 26-E of the SARFAESI Act and Section 37 of the MVAT Act it would be clear that the secured creditor would have a first charge over an asset and the charge created in favour of the State of Maharashtra under Section 37 of the MVAT Act would be subject to the first charge created by the Central Legislation namely, Section 26-E of the SARFAESI Act. In view of this settled legal position and in the background of the facts established in this case, in our view, the action initiated by the respondent Nos.1, 2 and 3 to the extent of two properties mentioned in para No. 6 and 7 of the petition, cannot be sustained. We, therefore, proceed to pass following order:

 

ORDER

1. The action of attachment and creating charge over the secured assets of the petitioner-Bank initiated by the respondent Nos. 2 and 3 for the recovery of sales tax dues outstanding against the respondent No. 4 and the attachment order dated 31/10/2017 is set aside to the extent of the secured assets of the petitioner-Bank mentioned in para Nos. 6 and 7 of the petition.

 

Rule is made absolute in the aforesaid terms.

 

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