HC Bombay (30.08.2022) in Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai, & Anr. [Writ Petition No. 2935 of 2018 & others] held that;
The dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I & B Code would rank superior to the dues of the relevant department of the State Government.
Therefore, on the face of it, the 2016 Amending Act has not been made applicable retrospectively but has taken effect from the date notified by the Central Government.
The provisions of Chapter IV-A of the SARFAESI Act would have application prospectively from the date the same was brought into force, i.e., January 24 2020.
It is well settled that where a statute provides for a thing to be done in a particular manner, then it has either to be done in that manner or not at all.
“A secured creditor, finding that it is disabled from obtaining the benefit of ‘priority’ in terms of section 26E of the SARFAESI Act for want of CERSAI registration, cannot fall back on section 31B of the RDDB Act to claim ‘priority’;
Without recourse having been taken to the procedure envisaged in the RDDB Act for recovery of its dues and without there being a determination of its claim by the DRT to the effect that any sum due from the borrower is payable to it, a secured creditor is not entitled to invoke the provisions of section 31B.
This being the text of section 26E, which is to be read in the context in which it is set, leads to the irresistible and inevitable conclusion that unless the security interest is registered, neither can the borrower seek enforcement invoking the provisions of Chapter III of the SARFAESI Act nor does the question of priority in payment would arise without such registration.
In other words, if the immovable property of the defaulter is shown to have been attached in accordance with law prior to Chapter IVA of the SARFAESI Act, or for that matter section 31B of the RDDB Act, being enforced, and such attachment is followed by a proclamation according to law, the ‘priority’ accorded by section 26E of the former and section 31B of the latter would not get attracted.
Excerpts of the order;
# 1. A Division Bench of this Court (cor. Chief Justice and M.S. Karnik, J.) while considering this batch of writ petitions was of the view that the issues emerging for decision therein can be advantageously heard and disposed of by a larger Bench. In deference to the order dated 25th November 2021 passed by such Bench and in exercise of power conferred on the Chief
Justice by rule 8 of Chapter I of the Bombay High Court Appellate Side Rules, 1960, this larger Bench was constituted. The parties were put on notice and heard at length on multiple
legal and factual issues.
# 2. The controversy lies in a narrow compass, with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security interest Act, 2002 (hereafter “SARFAESI Act”, for short) and the Recovery of Debts and Bankruptcy Act, 1993 (hereafter “RDDB Act”, for short) taking centre-stage. Who between a secured creditor [as defined in section 2(1)(zd) of the SARFAESI Act and section 2(1)(la) of the RDDB Act], and the taxing/revenue departments of the Central/State Governments, can legally claim priority for liquidation of their respective dues qua the borrower/dealer upon enforcement of the ‘security interest’ [as defined in section 2(1)(zf) of the SARFAESI Act] and consequent sale of the ‘secured asset’ [as defined in section 2(1)(zc) of the SARFAESI Act], in view of the extant laws, is the broad question that we are tasked to decide. This question, in turn, raises certain other substantial questions of law, which would also call for answers and we propose to answer them too.
# 3. The parties have, in course of their arguments, referred to the provisions of the Maharashtra Land Revenue Code, 1966 (hereafter “MLR Code”, for short), the Maharashtra Value Added Tax Act, 2002 (hereafter “MVAT Act”, for short), the Bombay Sales Tax, 1959 (hereafter “BST Act”, for short) and the Maharashtra Goods and Services Tax Act, 2017 (hereafter “MGST Act”, for short), more particularly sections 37 and 38C of the MVAT Act and the BST Act, respectively. These similarly worded sections, starting with non-obstante clauses, provide that any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable by a dealer or any other person shall be the first charge on the property of the dealer or the person, as the case may be, subject to any provision regarding creation of first charge in any Central Act for the time being in force. Section 82 of the MVAT Act is similarly worded, except that creation of such first charge would be subject to any Central Act for the time being in force is not to be found there. These provisions have necessarily to be read with section 26E of the SARFAESI Act and section 31B of the RDDB Act to ascertain the correct legal position.
# 6. Prior to 1993, for effecting recovery of debts, the lenders were required to institute suits regulated by the provisions of the Code of Civil Procedure (hereafter “CPC”, for short). However, the normal time-consuming process of recovery through suits did not suit the recovery of dues. Multifarious problems surfaced. Drying up of financial liquidity, thereby retarding economic progress, emerged as the prime problem. Without recovery of the dues, the lenders found it difficult to lend further financial assistance. It is at this stage that the Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereafter “RDBFI Act”, for short) making provisions for establishment of Tribunals for expeditious adjudication and recovery of debts due to the lenders and for matters connected therewith or incidental thereto. The RDBFI Act, which came into force w.e.f. 24th June 1993 all over the country except Jammu and Kashmir, was the legislative source of creation of Debts Recovery Tribunals (hereafter “DRTs”, for short) in various states. Upon becoming functional, the lenders started pursuing their remedy before the DRTs by instituting recovery proceedings before it in accordance with the RDBFI Act.
# 7. Challenges to the constitutional validity of the RDBFI Act were laid before the Delhi High Court, the Gauhati High Court and the Karnataka High Court. Such challenges succeeded. However, the Supreme Court by its decision reported in (2002) 4 SCC 275 (Union of India vs. Delhi High Court Bar Association) overruled the judgment and order impugned before it and upheld the provisions of the RDBFI Act.
# 8. In due course of time, recourse taken by the lenders to the DRTs under the RDBFI Act on a large scale coupled with other reasons, which we need not discuss here, led to the perception that the desired results were not being achieved. This led to constitution of various committees to suggest ameliorative measures keeping in view the changing times and the economic situation for overcoming old and conventional methods of financing and recovery of dues. Based on the suggestions that were received and after thorough deliberations, the Parliament enacted the SARFAESI Act and made it applicable throughout the country three days short of the eighth birthday of the RDBFI Act, on 21st June 2002, to be precise. Securitisation of debts, classification of Non- Performing Assets (hereafter “NPA”, for short) and evolving means for faster recovery of dues without judicial intervention were, inter alia, the key features of the SARFAESI Act, with quick enforcement of security interest at its heart.
The Questions
# 44. Keeping in view the rival submissions, we have considered it appropriate to formulate the following substantial questions of law for answers:
a. Having regard to the statutory provisions under consideration, does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government [under the BST Act/MVAT Act/MGST Act] to appropriate the amount realized by the sale of a secured asset?
b. Whether, despite section 26E in the SARFAESI Act or section 31B of the RDDB Act being attracted in a given case, dues accruing to a department of the Government ought to be repaid first by reason of ‘first charge’ created over any property by operation of law (viz. the legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor?
c. Are the provisions, inter alia, according ‘priority’ in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act prospective?
d. Whether section 31B of the RDDB Act can be pressed into service for overcoming the disability that visits a secured creditor in enforcing its security interest under the SARFAESI Act upon such creditor’s failure to register the security interest in terms of the amendments introduced in the SARFAESI Act?
e. Whether the priority of interest contemplated by section 26E of the SARFAESI Act could be claimed by a secured creditor without registration of the security interest with the Central Registry? Depending on the answer to this question, whether correct proposition of law has been laid down (extracted infra) in paragraph 21 of the Division Bench decision reported in 2020 (2) Bom. C. R. 243 (OS) [ASREC (India) Limited vs. State of Maharashtra and Ors.] and in paragraph 35 of the Division Bench decision, reported in 2021 (2) Mh. LJ 721 (State Bank of India vs. the State of Maharashtra and Ors.)?
f. When, and if at all, can it be said that the statutory first charge under the State legislation, viz. the BST Act, the MVAT Act and the MGST Act, as the case may be, stands displaced having regard to introduction of Chapter IV-A in the SARFAESI Act from 24th January 2020? And
g. Whether an auction purchaser of a secured asset would be liable to pay the dues of the department in order to obtain a clear and marketable title to the property having purchased the same on “as is where is and whatever there is basis”?
Answers to Questions (a) & (b):
# 73. The 2016 Amending Act also introduced a fresh chapter (Chapter IV-A) in the SARFAESI Act adding four more sections thereto, i.e., sections 26B to 26E. The object that the Parliament had in mind while incorporating Chapter IV-A in the SARFAESI Act seems to be clear as crystal. The dominant theme of the additions in the statute were intended to emphasize upon the need to register transactions of securitisation, reconstruction and creation of security interest with the Central registry (hereafter “CERSAI”, for brevity) and, accordingly, provisions were made to make such registration mandatory for a secured creditor or other creditor to avail the benefits flowing therefrom, as we would presently proceed to notice.
# 79. The disabling provision in section 26D and the enabling provision in section 26E, both begin with non-obstante clauses, as noticed above. The scheme of Parts III and IV-A of the SARFAESI Act envisages benefits to a secured creditor who is diligent and obtains CERSAI registration while depriving a secured creditor of even taking recourse to Chapter III without the requisite registration.
# 81. In Maharashtra, there are multiple legislation providing, by express statutory intendment, for ‘first charge’ on property of a person who defaults in payment of Government dues, by whatever name the dues are called. Such statutory intendment, apart from the BST Act, the MVAT Act and the MGST Act, is traceable in at least 4 (four) other legislations in the State of Maharashtra. Section 212 of the Mumbai Municipal Corporation Act, 1888, section 141 of the Maharashtra Municipal Corporations Act, 1949, section 109 of the Maharashtra Town and Country Planning Act, 1966 and section 331(1)(iii)(b) of the MLR Code, 1966, are the various sources of creation of first charge on property/plot. It would equally be important to note what section 169 of the MLR Code provides.
88. Bare perusal of the 2016 Amending Act would show that the dues of the Central/State Governments were in the specific contemplation of the Parliament while it amended the RDDB Act and the SARFAESI Act, both of which make specific reference to debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority and ordains that the dues of a secured creditor will have ‘priority’, i.e., take precedence. Significantly, the statute goes quite far and it is not only revenues, taxes, cesses and other rates payable to the State Government or any local authority but also those payable to the Central Government that would have to stand in the queue after the secured creditor for payment of its dues.
# 89. The effect of using the word ‘priority’ in section 26E of the SARFAESI Act, according to us, is this. The rights accorded to ‘first charge’ holders by Central as well as State legislation
having been known to the Parliament, in such a situation, what the Parliament intended by exercising its legislative power by introducing amendments in the SARFAESI Act, more particularly by incorporating section 26E therein, was to explicitly make the valuable right of the ‘first charge’ holder subordinate to the dues of a second creditor. The rights of such of the first charge holders accorded by several legislations enacted by the State, having regard to the language in which section 26E is couched, would rank subordinate to the right of the secured creditor as defined in section 2(1)(zd) subject, of course, to compliance with the other provisions of the statute. Acceptance of the contra-arguments of learned counsel for the State/respondents would undo what the Parliament has chosen to do.
# 92. In view of the foregoing discussion, we have no hesitation to hold that the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I & B Code would rank superior to the dues of the relevant department of the State Government.
Answers to Questions (c):
3 95. Section 1(2) of the 2016 Amending Act states that the same shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. Insofar as the date of coming into effect and operation of Chapter IV-A of the SARFAESI Act as inserted therein by the 2016 Amending Act is concerned, perusal of section 2 of the 2016 Amending Act would reveal that different dates were required to be appointed for different provisions of the 2016 Amending Act to take effect and make it operational. On 26th December 2019, the Department of Financial Services in the Ministry of Finance, Government of India issued a notification appointing 24th January 2020 as the date on which sections 17 to 19 of the 2016 Amending Act would come into force. Section 18, which is relevant for the present purpose, was brought into force from 24th January 2020 and, thus, Chapter IV-A became operational with effect from that date. Surely, if the Parliament had intended that the provisions of Chapter IV-A were to be made applicable from a previous date, the notification would have said so. Therefore, on the face of it, the 2016 Amending Act has not been made applicable retrospectively but has taken effect from the date notified by the Central Government.
# 99. Applying these tests to Chapter IV-A, coupled with the express provision in section 26D regulating the exercise of power by secured creditors by barring them to take recourse to Chapter III of the SARFAESI Act without the CERSAI registration, there could be little hesitation to hold that section 26E of the SARFAESI Act would apply prospectively. 100. Pertinently, in the cases that we have in hand, the newly incorporated provisions cast certain mandatory duty and obligation on secured creditors. If they seek to invoke the provisions of Chapter III of the SARFAESI Act and enforce the security interest, the same needs to have a CERSAI registration. Such creditors would be entitled to seek ‘priority’ in terms of section 26E only after the security interest is registered and other provisions of the SARFAESI Act are complied with. Provisions in Chapter IV-A cannot be construed in a manner so as to disturb, impair or divest the State of its accrued rights. Sections 26D and 26E of the SARFAESI Act no doubt begin with non-obstante clauses. However, such non obstante clauses would override any law for the time being in force evincing a result contrary to or inconsistent with sections 26D and section 26E but may not be so read so as to override and nullify an exercise of right by the relevant department of the State under any other law for the time being in force, and action taken in pursuance thereof, leading to accrual of some legal interest or benefit.
# 101. On the flip side, if the newly incorporated provisions casting a mandatory obligation on a secured creditor to register the security interest created in its favour to claim priority in payment is read to apply with retrospective effect, it could bring about at least one perceivable disastrous consequence. Actions taken under Chapter III of the SARFAESI Act including measures to take over possession of the secured asset prior to Chapter IV-A becoming operational, i.e., without CERSAI registration of the security interest sought to be enforced, could be challenged as ultra vires the SARFAESI Act itself. If such a challenge were to succeed, there could be sort of a cloudburst of complications. A reading that Chapter IV-A applies prospectively would, however, save all such exercises of enforcement of unregistered security interest, thereby not being liable to interdiction on the ground of absence of registration of the security interest upon a challenge being thrown by a defaulting borrower.
# 102. We, thus, agree with the decisions in Bank of Baroda (supra) and ASREC (INDIA) Ltd. (supra) and answer the question by holding that the provisions of Chapter IV-A of the SARFAESI Act would have application prospectively from the date the same was brought into force, i.e., January 24 2020.
Answers to Questions (d):
# 106. First, although the end result of both the statutes, i.e., the RDDB Act and the SARFAESI Act is recovery of money, yet, while the process of recovery under the former enactment is entirely through the procedure laid down therein and is largely court driven, the process of recovery under the latter is essentially without court intervention. Nature of the two proceedings is, therefore, completely different.
# 114. The text of section 31B of the RDDB, beginning with a non-obstante clause, has been noticed above. Also, bearing the principles laid down in the aforesaid authorities with regard to the effect or impact of a non-obstante clause, the conclusion is inescapable that section 31B cannot be pressed into service in all cases where a secured creditor seeks enforcement of a security interest by taking recourse to the SARFAESI Act. The non-obstante clause in section 31B would kick in should there be proceedings before the DRT and in furtherance of orders passed therein, a process is initiated for recovery of the dues of the secured creditor. We are inclined to be restrictive in our view that in such cases only, where the proceedings originate in the DRT under the RDDB Act, would the non-obstante clause in section 31B override all other provisions whereunder interest in respect of the same property may have been created in favour of other persons or authorities and the rights of the secured creditor to realize secured debts shall have priority and be paid in priority. Thus, such provision (section 31B) cannot be invoked or applied to a sale under the SARFAESI Act, which is a sale by the secured creditor without court intervention. The contention of Mr. Narula, resting on Transcore (supra), is that action under the RDDB Act can be abandoned and recourse taken to the SARFAESI Act and, therefore, the converse is also permissible. It is indeed permissible for a secured creditor to abandon steps taken by it under Chapter III of the SARFAESI Act because of any legal disability to carry the action forward and to initiate original proceedings under the RDDB Act for recovery of dues, but Mr. Narula’s contention would not commend further acceptability for us to hold that whenever a secured creditor is faced with the disability posed by sections 26D and 26E of the SARFAESI Act, it can overcome the same by invoking section 31B of the RDDB Act.
# 115. Secondly, it is well settled that where a statute provides for a thing to be done in a particular manner, then it has either to be done in that manner or not at all. . . . .
# 117. Thirdly, we need to remember that both the enactments, i.e., the RDDB Act and the SARFAESI Act, are special enactments laying down special but separate schemes for recovery of money from defaulting borrowers. One cannot be permitted to take a part of a special scheme and apply it to a separate special scheme. It could not have been the legislative intent that a secured creditor, faced with the disability arising out of an absence of a CERSAI registration after having illegally taken recourse to Chapter III of the SARFAESI Act, would be permitted to shift track and claim a priority in payment of dues relying on section 31B of the RDDB Act. If such a course were allowed, serious consequences arise. First, the illegal action of taking possession of the second asset without the intervention of the court could get legalized, which would run counter to the schemes for recovery of debts envisaged in the SARFAESI Act as well as the RDDB Act. Secondly the entire object of introduction of Chapter IV-A in the SARFAESI Act would get frustrated and be rendered futile.
# 118. That apart, a provision similar to that of section 31B of the RDDB Act is already there in the SARFAESI Act, 2002 in the form of section 26E can hardly escape notice. The Parliament definitely did not intend to render the provisions of section 26D otiose and superfluous by inserting section 26E immediately after section 26D in the same chapter by the same Amending Act. Both were intended to be and have to be read together; both have to be respected and given effect to, in the context of the situation that may be obtaining at the material point of time. In such view of the matter, relying on a similar provision of a different statute in order to undo the effect of another statute would amount to doing exactly that, which the other statute does not permit.
# 128. In view of the foregoing discussions, we agree with learned counsel for the State/respondents and answer the question by holding that
(a) a secured creditor, finding that it is disabled from obtaining the benefit of ‘priority’ in terms of section 26E of the SARFAESI Act for want of CERSAI registration, cannot fall back on section 31B of the RDDB Act to claim ‘priority’;
(b) the overwhelming factor of determination of a lis by the DRT has to be given its due worth and hence, the benefit of ‘priority’ that section 31B envisages is for a secured creditor who institutes proceedings under the RDDB Act and is successful in having an interim or final determination in its favour that a sum is due and payable (in section 31B) as distinguished from the debts due (in section 26E).
(c) section 31B of the RDDB Act being a substantive provision, it cannot be invoked by a secured creditor faced with the disability posed by section 26E of the SARFAESI Act; and
(d) without recourse having been taken to the procedure envisaged in the RDDB Act for recovery of its dues and without there being a determination of its claim by the DRT to the effect that any sum due from the borrower is payable to it, a secured creditor is not entitled to invoke the provisions of section 31B.
Answers to Questions (e):
# 129. The entire scheme of Chapter IV-A of the SARFAESI Act, as introduced by the Amending Act of 2016, leaves no manner of doubt that the object for its introduction is salutary. We have, in fact, discussed the noble objects that introduction of Chapter IV-A of the SARFAESI Act intends to achieve. The drastic power made available to a secured creditor by provisions contained in section 13 and the other provisions of the SARFAESI Act to dispossess the borrower/guarantor from the secured asset without intervention of Courts but necessarily upon compliance with the procedural safeguards laid down therefor has seemingly been arrested to a limited extent by incorporation of section 26D by the 2016 Amending Act. Section 26D, which also opens with a non-obstante clause, prohibits a secured creditor from exercising the rights for enforcement of security interest conferred by Chapter III, unless the secured interest created in its favour by the borrower has been registered with the CERSAI. Not only therefore registration with the CERSAI has been made
a mandatory pre-condition for invocation of the provisions contained in Chapter III of the SARFAESI Act, the provisions relating to debts that are due to any secured creditor being payable to such creditor in priority over all other debts and revenue, taxes etc. is available to be invoked only after the registration of security interest. This being the text of section 26E, which is to be read in the context in which it is set, leads to the irresistible and inevitable conclusion that unless the security interest is registered, neither can the borrower seek enforcement invoking the provisions of Chapter III of the SARFAESI Act nor does the question of priority in payment would arise without such registration.
Answers to Questions (f):
# 135. A decision necessarily has to be rendered by us bearing in mind the State legislations under consideration vis-à-vis the RDDB Act and the SARFAESI Act for the same to be applicable in this State; hence, it would be appropriate to decide when exercise of the right by the department of the State can be said to be complete so as to avoid the rigours of section 31B and section 26E, as the case may be. 136. We have noted what section 37 of the MVAT Act is all about. Section 37 in sub-section (1) provides for the creation of first charge on the property with respect to a tax or sum payable thereunder. Sub-section (2) provides that the said first charge shall be deemed to have been created upon the expiry of the period specified in sub-section (4) of section 32. Therefore, the charge attaches to the property of the dealer from the time it comes into effect, i.e., from the time the tax becomes payable under section 32(4) of the Act.
# 138. Thus, where a return is filed but the admitted tax has not been paid, the charge is created on the date of such filing as the tax is payable forthwith under section 32(4)(a)(i). In other cases, the tax, penalty or interest is payable within 30 days from the date of notice [section 32(4)(b)(i)-(v)]. Therefore, the charge would crystallize on the expiry of 30 days in respect of such amounts.
# 139. However, mere creation of charge is not enough. The expression ‘charge’ does not appear to have been defined in the MVAT Act. Nonetheless, this concept is well known in property law and we may draw guidance from section 100 of the ToP Act, where ‘charge’ is defined as follows:
“100. Charges.- Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property, and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge. Nothing in this section applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust, and, save as otherwise expressly provided by any law for the time being in force, no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge.” (emphasis ours)
# 140. The section itself in unambiguous terms indicates that a charge may not be enforced against a transferee if he did not have any notice of the same, unless by law the requirement of such notice has been waived. This position seems to be the accepted position in law.
# 141. We have not been shown any law that exempts the requirement of notice of the charge for its enforcement against a transferee who had no notice of the same. 148. Sub-section (4) of section 20B of the SARFAESI Act, which we have noticed above, ordains that every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.
# 149. Although the said provision demands compliance by the Central Government, any State Government and any local authority entrusted with recovery of tax to file with the Central Registry any attachment order issued by it, avoidance of such compliance was attempted by referring to the fact that the form and manner of filing attachment orders have not yet been prescribed by rules framed under the SARFAESI Act and, therefore, sub-section (4) has still not been made operative.
# 150. The contention that rules are yet to be framed for making sub-section (4) of section 20B operational is wholly incorrect. By a notification dated 24th January 2020 issued by the Department of Financial Services in the Ministry of Finance, Govt. of India, published in the Gazette of India of even date, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) (Amendment) Rules, 2020 were duly notified whereby amendments were incorporated in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 (hereafter ‘2011 Rules’, for short). In view of the amendments that have now been incorporated in the 2011 Rules with effect from the date Chapter IV-A of the SARFAESI Act was made effective and enforceable, the relevant department of the State Government despite attachment orders being issued by the competent authority can only avoid compliance of sub-section (4) of section 26B at its own peril. We hold that attachment orders issued post 24th January 2020, if not filed with the Central Registry, any department of the Government to whom a person owes money on account of unpaid tax has to wait till the secured creditor by sale of the immovable property being the secured asset mops up its secured dues.
# 154. We are of the considered opinion, on facts and in the circumstances, that unless attachment of the defaulter’s immovable property is ordered in the manner ordained by the MLR Code and as prescribed by the MRLR Rules and due proclamation thereof is made, even the creation of charge on such immovable property may not be of any real significance, not to speak of demonstrating with reference to evidence that the transferee had actual or constructive notice of such charge. If there has been an attachment and a proclamation thereof has been made according to law prior to 24th January 2020 or 1st September 2016, i.e., the dates on which Chapter IV-A of the SARFAESI Act and section 31B of the RDDB Act, respectively, were enforced, the department may claim that its dues be paid first notwithstanding the secured dues of the secured creditors; but in the absence of an order of attachment being made public in a manner known to law, i.e., by a proclamation, once Chapter IV-A of the SARFAESI Act or section 31B, as the case may be, has been enforced, the dues of the secured creditor surely would have ‘priority’. In other words, if the immovable property of the defaulter is shown to have been attached in accordance with law prior to Chapter IVA of the SARFAESI Act, or for that matter section 31B of the RDDB Act, being enforced, and such attachment is followed by a proclamation according to law, the ‘priority’ accorded by section 26E of the former and section 31B of the latter would not get attracted.
Answers to Questions (g):
# 158. A conjoint reading of the aforesaid rules admits of no doubt that the authorized officer while putting up an immovable property, i.e., the secured asset, for sale, is under a duty to notify, inter alia, the details of the encumbrances (in respect of such property that is proposed to be sold) which are known to the secured creditor as well as to require the purchaser to deposit money to discharge the encumbrances.
# 159. The Supreme Court in its decision in AI Champdany Industries Ltd. (supra) after considering the definition of ‘encumbrance’ in several law dictionaries, held that an ‘encumbrance’ “must be capable of being found out either on inspection of the land or the office of the Registrar or a statutory authority. A charge, burden or any other thing which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust or a lien or an easement. Encumbrance, thus must be a charge on the property. If by reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance”.
# 160. Till 24th January 2020, it may not have been possible for a secured creditor to know precisely all encumbrances in respect of the immovable property. With the insertion of section 26B in the SARFAESI Act read with the 2011 Rules, a secured creditor is expected to know some of such encumbrances if at all compliance of section 26B is resorted to by the Central Government, any State Government or a local authority, to whom money is owed by the defaulter being an owner of the property. Such a statutory mechanism for knowing the encumbrances in respect of the immovable property being put up for sale by auction not being available before 24th January 2020, the authorized officers were found to play it safe by inserting the “as is where is, whatever there is basis” clause in the sale advertisement. Once such clause is inserted in the advertisement and the prospective purchaser upon bidding in the auction emerges as the highest bidder, normally such purchaser cannot insist upon issuance of sale certificate without clearing the liability of meeting other dues in relation to such property. This is because he participates in the auction and bids, with his eyes open, that the sale would be on “as is where is, whatever there is basis”. Having so participated, the prospective purchaser cannot wriggle out of the consequences and claim that the other dues are not payable by him if he cannot disprove constructive notice of the charge created on the property put up for auction sale. If indeed the department of the Government fails to act in terms of section 26B of the SARFAESI Act read with the 2011 Rules, consequences are bound to follow which have to be accepted by such department.
# 161. We, therefore, answer this question by observing that notwithstanding the duty of the authorized officer to indicate in the sale advertisement inviting bids the encumbrance(s) attached to the immovable property, i.e., the secured asset, as known to the secured creditor, if at all any detail in regard to such encumbrance(s) is not indicated but the sale is expressly made on “as is where is, whatever there is basis”, the transferee shall be duty bound to deposit money for discharge of the encumbrance(s) provided, of course, that such liability may be overcome if he is in a position to disprove the claim of the department that he had no constructive notice of the charge, far less actual notice.
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