High Court Andhra Pradesh (22.04.2022) in Bank of India Vs. The State of Andhra Pradesh [Writ Petition No. 3892 of 2022 ] held that;
Equitable mortgage, which was duly created and registered in favour of the secured creditor being much prior to the order of attachment before judgment, the sale certificate issued under the provisions of the SARFAESI Act stands altogether on a different footing under law and the order of attachment before judgment will not have any bearing on the SARFAESI proceedings
Section 26E of the SARFAESI Act makes it clear that notwithstanding anything contained in any other law for the time being in force, after registration of the security, 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.
There cannot be any doubt that the rights of a secured creditor to realize the debts due and payable by sale of assets over which security interest is created, would have priority over all the debts.
The petitioner will be having first charge of the property if the order of attachment is subsequent to the date of mortgage.
We hold that the petitioner bank would have priority over the mortgaged property in question with regard to the loan due to the bank.
Excerpts of the order;
As notices on respondent Nos.3 to 6 were not served, this Court directed the petitioner to take substitute service by publishing the notice in a local vernacular language newspaper, which was done. In spite of the same, there is no representation on behalf of respondent Nos.3 to 6. However, notices on respondent Nos.7 to 11, 13 and 15 are served and acknowledgments to that effect are filed. Respondent Nos.12 and 14 refused to receive the notice. Respondent No.9 – auction purchaser is represented by Sri S.Satyanarayana Moorthy.
# 2. Heard Sri K.Harinarayana, learned counsel for the petitioner, learned Government Pleader for Registration and Stamps appearing for respondent Nos.1 and 2, and Sri S.Satyanarayana Moorthy, learned counsel for respondent No.9.
# 3. This Writ Petition is filed under Article 226 of the Constitution of India seeking the following relief:-
“….to issue a Writ or order or direction more particularly one in the nature of Writ of Mandamus to set aside the impugned letters dt.23.12.2021 and 30.12.2021, issued by the Sub-Registrar to the Petitioner’s Bank refusing to register the two sale certificates dt.22.12.2021 and dt.22.12.2021 issued in terms of Rule 9(6) of the Security Interest Rules, 2002 in favour of respondents 7 & 8 and in favour of Respondent No.9 respectively who purchased the mortgaged properties in e-auction Sale conducted by the petitioner Bank under SARFAESAI Act, 2002 and Rules made thereunder as being illegal, arbitrary, unconstitutional, without jurisdiction and contrary to Section 26(E) of the SARFAESI Act, 2002 and consequently, direct the SRO respondent No 2 herein to receive and register the said returned two sale certificates dt.22.12.2021 (pending Registration No.2178/2021) and dt.22.12.2021 (pending No.2238/2021) pursuant to the order dated 10.12.2021 of the Hon’ble High Court passed in WP No.22637/2021 immediately by giving permanent registration number and pass …”.
# 4. The circumstances, which led to filing of the present writ petition, are as under:
Sri Gajula Seshagiri Rao, who is the husband of respondent No.3, and respondent No.3 jointly availed housing loan to an extent of Rs.19.33 lakhs on 27.10.2015 from the petitioner bank against mortgage of their joint property i.e., land admeasuring 120 Sq.Yards with RCC building bearing D.No.9-2-61 (S.No.641/2, Block No.11-69, Assessment No.1546), Markandeyapuram, Gollaprolu Village, East Godavari District, by deposit of title deeds on 05.11.2015. Later, the said Seshagiri Rao, who was the Proprietor of M/s.Sri Gowri Shankar Traders, availed CC limit of Rs.60.00 lakhs from the petitioner bank for business purpose on 20.12.2017 against mortgage of his property i.e., 709 Sq.yards of land with two storied building bearing D.No.10-163, 10-172 (S.No.616/6, 620/7, Block No.11-69, Assessment Number 1546, Block No.9), Gandhinagar, Gollaprolu Village, East Godavari District, by deposit of title deeds at the Sub-Registrar Office, Pithapuram. The said mortgages were registered before CERSAI Authority under Section 23 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter, referred to as the ‘SARFAESI Act’).
The petitioner initiated proceedings under the SARFAESI Act by issuing notice under Section 13(2) of the SARFAESI Act on 04.11.2018 for C.C. limit and on 17.7.2019 for housing loan and mortgaged properties were sold in a public auction held on 15.10.2020. The first property of 120 Sq.yds was sold for Rs.31.90 lakhs in favour of Sri Veerendra Kumar Nagireddy and Smt Keerthi Naga Divya, who are respondent Nos.7 and 8, and the second property of 709 Sq.yds was sold for Rs.74.20 lakhs in favour of Sri Jyothula Chinna Bullayya – respondent No.9 herein and separate sale certificates, dated 16.4.2021, were issued to them. When they approached the S.R.O./respondent No.2 for registration, he refused to register the same on the ground that the subject properties are placed in prohibited list due to attachment orders received and even when the petitioner bank, on 15.7.2021, clarified the legal position to the S.R.O., he refused to register the said sale certificates. So the petitioner bank filed W.P.No.22637 of 2021 seeking a direction to the S.R.O. for registration of the said sale certificates and on contest, the said writ petition was disposed of on 10.12.2021 with a liberty to the bank to present the said sale certificates for registration to the said S.R.O. within a specified time and to take necessary steps in accordance with law.
When the officials of the petitioner bank and auction purchasers approached respondent No.2 and presented the two sale certificates with required stamp duty/fee, the Sub-Registrar gave temporary registration No.2178/2021 for the 1st sale certificate in favour of respondent Nos.7 and 8 and for the 2nd sale certificate in favour of respondent No.9, gave temporary registration No.2238/2021 and, vide letters, dated 23.12.2021 and 30.12.2021 on the ground that the properties covered under the said sale certificates are in prohibited list (7-A attachment of immovable property), which were covered under the attachments made by the learned Senior Civil Judge, Pithapuram. Challenging the inaction on the part of respondent No.2, the present writ petition came to be filed.
# 5. As seen from the record, earlier, the petitioner herein filed W.P.No.22637 of 2021 seeking a direction to respondent No.2 to register the sale certificates in respect of the property in question in favour of the auction purchasers, who are respondent Nos.7 to 9. By an order, dated 10.12.2021, the said writ petition was disposed of with a liberty to the petitioner to present the documents in terms of the Registration Act and Stamp Act within three weeks from that day and upon doing so, respondent No.2 was directed to take necessary steps in accordance with law within two weeks from the date of submission of the documents before him. It is stated that in spite of presentation of the documents, the Sub-Registrar refused to register the documents on the ground that there is no direction directing him to register the said documents.
# 6. As seen from the material on record, the properties were mortgaged with the bank by the borrowers in the year 2015 and 2017. The attachment orders came to be passed in I.A.No.1512 of 2018 in O.S.No.133 of 2018 and I.A.No.1510 of 2018 in O.S.No.134 of 2018 on the file of the learned Senior Civil Judge, Pithapuram on 12.9.2018.
# 7. The question that arises for consideration is:
“Whether this Court can direct the Sub-Registrar to register the sale certificates in view of the order of attachments passed by the civil Court?”
# 8. POINT:-
Sri K.Harinarayana, learned counsel for the petitioner, would submit that the issue involved is no more res integra and is covered by the orders passed by this Court. Referring to Sections 26E and 34 of the SARFAESI Act, he would submit that respondent No.2 cannot refuse to register the sale certificates and pleads that the action of respondent No.2 is illegal and incorrect.
# 9. Learned Government Pleader for Registration and Stamps opposed the same but however, does not dispute the law laid down in catena of judgments.
# 10. Before going further, it will be just and proper to refer to Section 26E of the SARFAESI Act, which reads as under:
Section 26E: Priority to secured creditors-
“26E. 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.]
# 11. Section 31B of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (Act 51 of 1993) reads 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 realize 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.
# 12. Further Section 34 of the SARFAESI Act reads as under:-
Section 34: Civil court not to have jurisdiction-
“34. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).”
# 13. Further, the word ‘Secured Creditor’ as defined in Section 2(zd) of the SARFAESI Act, is as under:
“Secured Creditor” means —
i) any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (1);
ii) debenture trustee appointed by any bank or financial institution; or
iii)an asset reconstruction company, whether acting as such or managing a trust set up by such securitization company or reconstruction company for the securitization or reconstruction, as the case may be; or
iv) debenture trustee registered with the Board appointed by any company for secured debt securities; or
v) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;
# 14. A reading of Section 26E of the SARFAESI Act makes it clear that it starts with a non-obstante clause and it provides that after the registration of security interest, the debts due to the secured creditor shall be paid first and in priority over all other debts and revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. Therefore, it is clear that a person in whose favour there is a registration of security interest, he would get priority over the sale proceeds.
# 15. The argument advanced by the learned Government Pleader is that since the section of law is not notified, the same has no force of law and is not enforceable. This submission requires to be rejected at the outset in view of the undisputable fact that Gazette of India No. 5, Extraordinary, Part-II, Section-1, dated 16.08.2016, published by the Ministry of Law & Justice [Legislative Department] reflects that Section 26E received the assent of the President of India on 12.08.2016 and it was duly published in the Gazette for general information. Hence, this provision of law came into effect with effect from 16.08.2016 and has force of law.
# 16. The above provision, which came into effect on 01.09.2016, starts with a non-obstante clause. It will govern the rights of the parties in respect of a pending lis. The above provision reflects, without doubt, that the rights of a secured creditor to realize secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues. Section 31B includes secured debts due and payable to them by sale of assets over which secured interest is created.
# 17. Issue identical to case on hand came up for consideration in State Bank of India v. The State of Andhra Pradesh1 to which one of us was a party. In the said case, the Court after referring to the provision of law and cases on the subject, held as under:
“11. Having regard to the above and in the absence of any right or claim by any third party other than those in the writ petition over the subject property, the present Writ Petition is disposed of directing respondent No.2 to register the subject property in favour of the auction purchaser, who is not a party herein. After adjusting the amount due to the petitioner Bank from the auction proceeds, the remaining amount, if any, shall be credited to the account of respondent No.3 and if any amount is still left over, the same may be returned to respondent No.4. There shall be no order as to costs”.
# 18. In City Union Bank Limited v. Sub-Registrar, Peddapalli & Ors2 decided by a Division Bench of the High Court for the State of Telangana and the State of Andhra Pradesh, held that equitable mortgage, which was duly created and registered in favour of the secured creditor being much prior to the order of attachment before judgment, the sale certificate issued under the provisions of the SARFAESI Act stands altogether on a different footing under law and the order of attachment before judgment will not have any bearing on the SARFAESI proceedings. It was further held that Section 26E of the SARFAESI Act makes it clear that notwithstanding anything contained in any other law for the time being in force, after registration of the security, 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.
# 19. Therefore, on a conjoint reading of Section 26E of the SARFAESI Act and Section 31B of Act 51 of 1993, there cannot be any doubt that the rights of a secured creditor to realize the debts due and payable by sale of assets over which security interest is created, would have priority over all the debts. The petitioner will be having first charge of the property if the order of attachment is subsequent to the date of mortgage. In the instant case, admittedly, the mortgage of the documents was in the year 2015 and 2017 and the attachment orders came to be passed in the year 2018 i.e., long after the property was mortgaged to the secured creditor. Hence, the rights of the petitioner bank/secured creditor to realize secured debts due and payable to it by sale of assets over which security interest is created shall have priority and, hence, the point is answered in favour of the petitioner bank and accordingly, we hold that the petitioner bank would have priority over the mortgaged property in question with regard to the loan due to the bank. Therefore, respondent No.2 is directed to register the subject property in favour of the petitioner bank.
# 20. Accordingly, the Writ Petition is allowed, as prayed for, directing respondent No.2 to receive the Sale Certificates issued by the petitioner bank in respect of the property in dispute and proceed further in registering the documents in accordance with the procedure established by law. No order as to costs.
Consequently, miscellaneous petitions pending, if any, in this writ petition shall stand closed.
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