Kotak Mahindra Bank Vs. M/s Kailash Oil Cake Industries. - 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.

High Court of Gujarat (08.02.2023) In Kotak Mahindra Bank Vs. M/s Kailash Oil Cake Industries. [R/Special Civil Application No. 22835 of 2022 ] held that;

• 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.

• 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.

• 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.

Excerpts of the order;

# 1. The petitioner is before this Court seeking to challenge the action of respondent No.11 – State Tax Authority and respondent No.12 – Revenue Authority vide communication dated 27.04.2022 issued by respondent No.11 and the entry made by respondent No.12 in revenue record pursuant to the said communication, qua the property in question.

# 2. The short facts leading to this petition are epitomized as under:

2.1 Respondent No.1 is the firm and respondents No.2 to 10 are the partners and guarantors of the firm, which has borrowed the money as loan from the petitioner Bank in the year 2014. Various mortgaged deeds were executed by and between the petitioner Bank and the respondent firm which were registered with the authority concerned time and again, from the year 2015 to 2018.

2.2 There was a major fire in the respondent firm in the year 2019.

2.3 Respondent firm declared NPA in the year 2019.

2.4 Respondent firm has tried to settle the issue with the petitioner bank under the One Time Settlement Scheme, but could not finalize for the reasons best known to them.

2.5 On 27.04.2022, a communication has been sent by respondent No.11 – State Tax Authority to respondent No.12 – Revenue Authority at Gondal for initiating proceedings for  attachment of the property in question which is mortgaged with the petitioner Bank since long for recovery of dues under the Gujarat Value Added Tax along with interest.

2.6 Respondent No.12 – the Revenue Authority has mutated the entry in the revenue record reflecting the dues of respondent No.11 and thereby causing attachment of the property in question.

# 3. Ms.Raval, learned advocate for the petitioner – Bank has submitted that the petitioner Bank is a secured creditor under the SARFAESI Act and its dues may be protected first. She has relied upon the decision of this Court recorded on Special Civil Application No.3025 of 2021 dated 27.10.2021 in the case of Bank of Baroda versus State of Gujarat and has submitted that this petition may be allowed by cancelling the entry recorded in the revenue record, so that the property in question will be free from all encumbrances and title of the property in question may not be affected. She has submitted that since the petitioner Bank is a secured creditor and has first right to recover its dues from the property in question which is in fact mortgaged with the petitioner bank first, if title of the property in question is marketable. She has submitted that this petition may be allowed.

# 4. Learned AGP Ms. Pooja Ashar for the respondents – State Authorities has submitted that the the Authorities have rightly sent the communication to the concerned revenue authority. She has submitted that there was a huge dues pending qua them under the VAT. She has submitted that the respondents – Tax Authorities may not be left with the huge dues. She has submitted that the rights of the State may be protected while allowing it to proceed against the assessee.

# 5. Rule. Learned AGP waives service of notice of rule on behalf of the State.

# 6. The issue involved in this petition is as to whether the dues of secured financial institution will have priority over State tax dues or not.

# 7. It is important to note here some disputed facts, which are as under :

7.1 The respondent firm has borrowed money as loan from the petitioner bank in the year 2014 and thereafter.

7.2 Various mortgage deeds were executed by and between the petitioner Bank and the respondent firm in the year 2015 to 2018. The same were registered with the authorities concerned.

7.3 The proceedings under the SARFAESI Act were initiated and ultimately, the respondent firm declared NPA in the year 2019.

7.4 Respondent No.11 – State Tax Authority has sent a communication for recovery of dues under the Gujarat Value Added Tax to respondent No.12 – the revenue authority and intimating them for initiating the proceedings for attachment of the properties in question which is already mortgaged with the petitioner bank.

# 8. Considering the undisputed facts as noted above, it is clear that the respondent firm has mortgaged the property in question first with the petitioner bank. The same is the registered mortgage with the concerned authority. It seems that the petitioner bank has created first charge / mortgage over the property in question and therefore, the petitioner is a secured creditor and has right to recover its dues first from the property in question, which is as such mortgaged with the petitioner bank.

# 9. At this stage, it would be refer to the provisions of Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which reads as under :

• “ 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 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.”

# 10. Further, the decision of this Court in the case of Kalupur Commercial Cooperative Bank Ltd., versus State of Gujarat – Special Civil Application No.17891 of 2018 dated 23.09.2019 is very clear about the issue on hand. Relevant paragraphs 9 to 14, 27, 29 to 35 and 48 to 55 are referred 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 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.

(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 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 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.”

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 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 non-obstante 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

New Delhi, the 1st September, 2016

S.O. 2831 (E).–In exercise of the powers conferred by sub-section (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 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 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 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.

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.

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 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.”

# 11. For more clarity, it would be fruitful to further refer to the decision of Hon’ble Apex Court in the case of Kotak Mahindra Bank Limited versus Girnar Corrugators Pvt. Ltd., reported in 2023 (1) SCALE 456, more particularly paragraph 9 thereof, which reads 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.”

# 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 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.

# 14. In view of above, the following order is passed.

• 14.1 The present petition is partly allowed.

• 14.2 Respondent No.12 is directed to remove the entry of charge, qua the State Tax Authorities, with regard to the property in question, forthwith.

• 14.3 It would be open for respondent No.11 – State Tax Authorities to initiate appropriate proceedings before appropriate forum against the defaulter person(s) / firm to recover its dues, in accordance with law.

• 14.4 Rule is made absolute to the aforesaid extent.

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Tarun International Ltd. Vs Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors - Auction under SARFAESI prior to CIRP & dues of EPFO and employees.

NCLAT (03.03.2021) in Tarun International Ltd. Vs  Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors. [Majority judgement in Company Appeal (AT) (Insolvency) No.1194 of 2019] held that; - 

• we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

 

Facts of the case;

"Anil Special Steel Industries Ltd" (CD) is an industrial company. It defaults, prompting OCs  to initiate Sec. 9 application, which is allowed by NCLT.

Prior to initiation of CIRP, "Allahabad Bank" (AB) the Financial Creditor, took over CD’s (Unit -1, Anil Special Steel Industries Ltd) Industrial Undertaking and auctioned it under SARFAESI to recover dues on a "as is where is, as is what is and whatever there is" basis . Tarun International Ltd.(TI) emerged the successful auction purchaser.

RP approaches NCLT to determine who'd pay liabilities of Workmen and Employees. NCLT rules Tarun International Ltd.(TI) would be liable for dues as the purchase was on a AIWI basis.

NCLAT upholds NCLT's decision citing that the Auction notice had clarified this. Further, Tarun International Ltd.(TI) was aware of potential liabilities.

 

Excerpts of the order;

On an application being IA No.32/60/JPR/2018 filed in CP No.(IB)- 35(ND)/2018, TA No.118/2018 filed by the Resolution Professional, the Adjudicating Authority (National Company Law Tribunal), Jaipur Bench, in terms of impugned order dated 1st October, 2019 passed a slew of directions saddling the Appellant with liability to bear all the claims of Respondent No.2- ‘Rastriya Anil Steel Majdoor Sangh’ and Respondent No.5 - Mr. Rajendra Company Appeal (AT) (Insolvency) No. 1194 of 2019 Sharma with allied and ancillary directions after recording a finding that Respondent No.3- Allahabad Bank had made it very clear to the Appellant to acquire the Unit No.1 of the Corporate Debtor on ‘as is where is basis, as is what is basis, whatever there is basis’ which implied that it shall also acquire all the liabilities thereon. Feeling aggrieved, the Appellant has assailed the impugned order through the medium of instant appeal on grounds set out in the memo of appeal to which we shall be adverting to as we proceed further.

# 4. Learned counsel for Appellant laid emphasis on the fact that the Adjudicating Authority had no jurisdiction as it could not pass orders in relation to prior transactions except in so far provided under Sections 44-45 of the ‘I&B Code’. It is contended that the impugned order is without jurisdiction and after issuance of Sale Certificate and delivery of possession to Appellant auction purchaser the property in question no longer remained the property of the Corporate Debtor. It is further submitted that the terms and conditions of the sale of the property clearly stated that the purchaser would receive the property free from all encumbrances. It is further submitted that the Appellant acquired only the property and not the company, therefore, the liability of the Corporate Debtor has been wrongly fastened upon the Appellant.

# 7. The sole issue for consideration in this appeal is whether the liability in respect of the workers and employees and other liabilities pertaining to Unit No.1 of the Corporate Debtor sold under the Act, 2002 prior to commencement of CIRP are the liability of Corporate Debtor or the Appellant- auction purchaser.

# 13. It further emerges from record that the Appellant subsequently tried to resile from the terms and conditions of sale, obviously to wriggle out of the liabilities that it was liable to pay in terms of acceptance of offer purchase letter dated 21st December, 2017. This was sought to be done unilaterally on the pretext that in the event of Appellant having backed out, the EMD would have been forfeited. This explanation was neither realistic nor plausible. By proceeding to accept the offer purchase Appellant unconditionally accepted the terms of sale. Reliance placed by Appellant on the letters dated 30th December, 2017, 23rd January, 2018 and 29th January, 2019 that it was only informed of the liabilities, it being specifically stated that the same were not demanded by the Bank, would be of no consequence as such liabilities passed on to Appellant in terms of the acceptance of offer purchase and sale letter with no demand put up by the Bank for its recovery from Appellant- auction purchaser. In the face of bulk of evidence staring in the face of the Appellant assigning the liabilities to it, the Appellant could not be permitted to unilaterally back out of such liability. With express stipulation in auction notice and all relevant documents connected with auction and sale proceedings under the Act, 2002, it cannot be said that this being a sale in auction proceedings under the Act, 2002, the auction purchaser would not be saddled with the liabilities of Corporate Debtor as only assets had passed on to it and not the liabilities of the Corporate Debtor which was faced with the prospect of triggering of CIRP, regard being had to demand notice served upon it under Section 8 of the ‘I&B Code’ prior to issuance of sale certificate. Therefore, stipulation in the Sale Certificate that the sale was free from encumbrances is irrelevant when the information in regard to encumbrances known to the creditor was shared with the Appellant through the correspondences referred to hereinabove and such encumbrances were yet to be discharged.

# 14. Dealing with the aspect of public auction incorporating a condition in the nature of ‘as is where is’, the Hon’ble Apex Court in “Punjab Urban Planning and Development Authority & Ors. vs. Raghu Nath Gupta and Ors.- Reported in (2012) 8 SCC 197” observed as under:-

• “17. We are of the view that the judgment in Amarjeet Singh (supra) is a complete answer to the various contentions raised by the respondents. We may reiterate that after having accepted the offer of the commercial plots in a public auction with a super imposed condition i.e. on “as is where is” basis and after having accepted the terms and conditions of the allotment letter, including installment facility for payment, respondents cannot say that they are not bound by the terms and conditions of the auction notice, as well as that of the allotment letter. On facts also, we have found that there was no inordinate delay on the part of PUDA in providing those facilities.” 

# 15. This is a complete answer to refute the issue raised by Appellant that it cannot be saddled with liability towards workman and employees as also other liabilities pertaining to Corporate Debtor.

# 16. In “Maharashtra State Co-operative Bank Ltd. v. Babulal Lade- CA No. 232 of 2016 decided on 04.12.2019”, it was observed by the Hon’ble Apex Court that the sale under the Act, 2002 is to be governed by the terms of the sale.

# 17. Mentioning that it was free from encumbrances would be inconsequential as long as the liabilities known to the Allahabad Bank and brought to the notice of the auction purchaser remain undischarged. There is considerable force in the contention raised by Respondent No.4 that dues of EPF are an encumbrance on the establishment and become first charge thereupon within the purview of Section 11(2) of the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952. Though the sale in auction proceedings was limited to Unit No.1 while the Corporate Debtor owned two units, mere fact of common ownership of two units by the Corporate Debtor would not make it one establishment. The two units were separate and independent units treated so by EPFO with separate registration numbers allotted to these units. Therefore, EPFO dues over Unit No.1 which was the subject of auction or sale under the Act, 2002 were the first charge over the unit only and the sale proceeds thereof could not be utilised by the Allahabad Bank without discharging the same. We are told that the Allahabad Bank has not joined the issue in regard to this position and even made a part payment of about Rs.17.51 lakhs as reflected at Page 456 of the appeal paper book.

# 18. Having dealt with the issue raised in this appeal in the context of material on record, respective contentions of parties, arguments advanced and the case law cited at the Bar, we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

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Dissenting Judgement Per; V. P. Singh, Member (T) in the above case;

J U D G M E N T

I have gone through the detailed judgement authored by Hon'ble Acting Chairperson Justice B L Bhatt. Still, I cannot persuade myself to agree with the views expressed by Hon'ble Acting Chairperson Justice Bhatt; I would like to give my finding separately. 

The Appellant has preferred this Appeal against the Impugned Order dated 1 October 2019 passed in IA No. 32/60/JPR/2018 in CP No. (IB) 35 (ND)/2018 by the Adjudicating Authority/National Company Law Tribunal Jaipur Bench 2. By Order dated 1 October 2019, the Adjudicating Authority has issued directions on the Application filed by Resolution Professional fastening the liability on the Appellant Tarun International Ltd to bear all the claims of Respondent No. 2 'Rashtriya Anil Steel Mazdoor Sangh' and Respondent No.5, Mr Rajendra Sharma with a further clarification that the Corporate Debtor cannot be fastened with any of the liabilities of Unit-1 of Corporate Debtor which was sold under the SARFAESI Act. The parties in this Appeal are referred by their original status in the company Petition for the sake of convenience.

# 2. The brief facts of the case are as under;

The Appellant 'Tarun International Ltd' is a bona fide Auction Purchaser of immovable property comprising of industrial land along with the plant and machinery (the property) owned by 'Anil Special Steel Industries Limited', Corporate Debtor ("ASSIL"), from the time before the initiation of Corporate Insolvency Resolution Process ("CIRP") against corporate Debtor 'ASSIL'. The property was sold to the Appellant by Allahabad Bank, Respondent, No 3 under the provision of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), vide sale certificate (under Rule 9 (6) of Security Interest Enforcement) Rules 2002) dated 9 February 2018, which was duly registered  in the office of Sub Registrar, Jaipur on the same day. 

# 3. The corporate Debtor owned two units, and the Appellant is the auction purchaser of Unit-1 of ASSIL. After the Sale of Assets of Unit-1 of the Corporate Debtor 'Anil Special Steel Industries Limited' under the SARFAESI Act by secured Creditor Allahabad Bank, the Application filed under Section 9 of the Insolvency and Bankruptcy Code 2016 was admitted by Order dated 5 March 2018 passed by the Adjudicating Authority. During the CIRP of the Corporate Debtor, the IRP, Mr Brij Kishore Sharma, collated the claims and constituted the Committee of Creditors (in short, CoC). Later, on a resolution passed by the CoC, the Resolution Professional, Mr Vikram Bajaj, replaced the IRP Mr Brij Kishore Sharma vide Order dated 14 May 2018 passed by Adjudicating Authority.

# 4. During CIRP, the RP filed IA No. 32/60/J PR/2018 in CP. No. (IB) 35 (ND)/2018 before the Adjudicating Authority seeking the following relief: 

• "Allow the present application and determine as to whether liabilities pertaining to unit-1 which had been sold under SARFAESI prior to the insolvency commencement date are payable by the purchaser of unit -1, i.e. Tarun international Ltd or the same continued to be admissible against the corporate debtor."

# 6. The Appellant has not been connected with and has no right, interest or obligations concerning ASSIL either at present or from the time before purchasing the property. The Adjudicating Authority on an Application filed by the Resolution Professional (in short "RP") u/s 60 (5) (b) and (c) of the I&B Code 2016 vide Order dated 1 October 2019 has held that the Appellant is liable to pay workmen's dues and other charges on the property. The Appellant contends that such findings are without jurisdiction because;

• The Adjudicating Authority under the Code has jurisdiction only about triggering of proceedings under Part II of the Code. 

• Jurisdiction of the Adjudicating Authority in relation to prior transactions is limited to the extent as provided under section 44 and 45 of the Code.

# 14. The Adjudicating Authority by the impugned Order directed that;

• a. The Respondent Number 2 shall bear all the claims of the Respondent No. 1 and Respondent No. 5.

• b. In the event any money which has been deducted towards the statutory dues of EPF and is still lying with the corporate Debtor, the RP shall forthwith credit the same to the appropriate accounts of the concerned authority.

• c. For recovery of the claims of any statutory dues, it is open for the Respondent No 1 and 5 to proceed against the Respondent No. 2 and 3.

• d. So for, the Corporate Debtor is concerned it cannot be fastened with any of the liability of Unit number 1, which was sold under the SARFAESI Act, 2002 by the Respondent No. 3, except with regard to the statutory dues of EPF, in case if it is lying still with the corporate Debtor as stated before. 

• With these directions, IA number 32/60/J PR/2018 is disposed of."

# 15. Following issues arises for the determination of this Appeal;

• 1. Whether the Adjudicating Authority under the I&B Code 2016 has jurisdiction to determine a bona fide auction purchaser's liability under the SARFAESI Act's provision when the property had been sold, and sale certificate was issued before the commencement of CIRP of the Corporate Debtor?

• 2. Whether the Adjudicating Authority can decide the liabilities of a third party auction purchaser, which had no role in the Corporate Debtor's Resolution Process and did not fall under the ambit of avoidance transactions as outlined under Sec 44 &45, under Section 60 (5) of the Code?

• 3. Whether the Sale of only Part of the Assets of the Corporate Debtor under the SARFAESI Act can be considered the Sale of a Company (or Part thereof) as a going concern to make the purchaser liable for workmen's dues?

Issue No. 1 to 3;

# 20. Undisputedly, the Appellant is the auction purchaser of the immovable property comprising industrial land, plant and machinery of Unit-1 owned by Anil Special Steel Industries Limited/ ASSIL, i.e. Corporate Debtor. Before commencement of the Corporate Insolvency Resolution Process against ASSIL, the property was sold by Allahabad Bank under the SARFAESI Act's provisions, 2002. Given the default by ASSIL, notices were issued against ASSIL u/s13 (2) & 13(4) of the SARFAESI Act on 1 November 2017 and 15 November 2017, respectively and the Sale of the property was done on "as is where is the basis, as is the basis, whatever there is basis" with the stipulation that the property was free from encumbrances.

# 21. It is pertinent to mention that in Clause 20 of the sale notice (supra), it is stated that "to the best of knowledge and information of the authorised officer, there is no encumbrance on the properties other than mentioned above (if any). However, the intending bidders – should make their own independent inquiries regarding the encumbrances and claims/the rights/dues/affecting the property, prior to submitting their bid. The e-auction advertisement does not constitute and will not be deemed to constitute any commitment or any representation of the Bank. The authorised officer/secured creditor shall not be responsible in any way for any third-party claims/rights/dues other than mentioned above (if any)."

# 22. It is also important to mention that in the sale notice, in the column about the details of the secured creditor's encumbrances, no details of liabilities were mentioned. But it is only mentioned that "other liabilities (statutory/other dues, if any) of the property put under e-auction as mentioned in this notice will be borne by the prospective purchaser".

# 23. In compliance with the above-mentioned sale notice, the Appellant submitted its bid on 15 December 2017 along with the earnest money deposit of ₹ 2.74 crores for participating in E-auction. On 19 December 2017, Allahabad Bank informed the Appellant about the Income Tax Department's demand letter and about the Employees dues. Allahabad Bank, however, clarified that the claims/dues are yet to be crystallised by the Competent Authorities, and the sale certificate in favour of the highest bidder shall be issued after obtaining necessary orders /directions from the Competent Authority/Court/Tribunal.

# 25. However, the Bank conducted an e-auction on 20 December 2017, wherein the Appellant submitted the highest bid of ₹ 27,61,00,000. After that, on 21 December 2017, Allahabad Bank issued acceptance of the offer of purchase and informed that since claims/dues are yet to be crystallised by the Competent Authority/Court, the sale certificate will be issued after obtaining the necessary order/direction from the Competent Authority/Court/Tribunal. On 26 December 2017, in the Appellant's Reply to Allahabad bank's letter dated 21 December 2017, it is stated that the conditions regarding the auction, imposed after accepting the earnest money, are illegal and are not binding on the Appellant.

# 26. After that, on 30 December 2017, Allahabad Bank, in response to the Appellant's letter dated 26 December 2017, issued a letter to Appellant clarifying the position that its letter dated 21 December 2017 was to draw the attention concerning the various dues of ASSIL and not a demand of any amount by the Bank. This letter is annexed with the Appeal paper book on page number 421 (Relevant para 8 and 9). Further, on 9 February 2018 registered sale certificate about the property sold to the Appellant was issued. The sale Certificate shows that the property sold under the SARFAESI Act was free from all encumbrances. The relevant portion of the sale certificate (page 450 of Appeal paper book)is given below for ready reference;

• "In pursuance to Senior Civil Judge Court and Chief Metropolitan Magistrate, Jaipur Order Number Nearly Dated 8th Further 2018 we have on behalf of consortium of four banks, i.e. Allahabad bank (lender), Bank of Maharashtra, Indian Overseas Bank, State Bank of India handed over the possession to M/S Tarun international Ltd… of the schedule property listed below, free-form all encumbrances known to the secured creditors, on deposit of the money by the undersigned.

# 32. Therefore, in the instant case on 5 March 2018, when CIRP commenced against the Corporate Debtor ASSIL, the IRP was authorised to take over its assets. But the property, which was already sold/auctioned before initiation of the CIRP and Sale Certificate dated 9 February 2018, was finally issued in pursuance of the Order of the Senior Civil Judge Court and Chief Metropolitan Magistrate Court Jaipur, was not the property of the Corporate Debtor. The auction purchaser was a third party which had no concern with the Corporate Insolvency Resolution Process of the Corporate Debtor, ASSIL. Thus, the corporate Debtor's liability can't be fastened on the third party, which happens  to be a stranger to the CIRP of the Corporate Debtor and that too by exercising powers as an Adjudicating Authority u/s 60(5) of the I & B Code 2016.

# 33. It is contended by the Appellant that the property of the Corporate Debtor ASSIL was sold, and the sale process was completed before initiation of CIRP under the Code. Therefore, the Adjudicating Authority exercising powers under the I&B Code had no jurisdiction to pass an order to fasten the Corporate Debtors' liability on the Appellant.

# 35. The first provision to Section 13 of the SARFAESI Act provides that where the secured creditor of a company opts to realise security, he may retain the secured assets' sale proceeds after depositing the workmen's dues to Liquidator. The second proviso to Section 13 imposes a duty on the liquidator to intimate the secured creditor about the workmen's dues. In such cases where workmen's dues cannot be ascertained, the liquidator is obligated to intimate the estimated amount of workers dues to the secured creditor. In such a case, the secured creditor may retain the secured assets' sale proceeds after depositing the amount of such estimated dues with the liquidator. 4th proviso to Section 13 of SARFAESI Act imposes a duty on the secured creditor to give an undertaking to the liquidator to pay the balance of the workmen dues if any. Thus, it is clear that if a company is being wound up and the secured creditor of such a company opts to realise his security, then the secured creditor has authority to retain the secured assets' sale proceeds after depositing the workmen's dues.

# 36. In the instant case, Allahabad Bank is a secured creditor of ASSIL which has auctioned the secured assets of the Corporate Debtor. There is not an iota of doubt that the alleged auction sale was under SARFAESI Act. Therefore, the Adjudicating Authority/National Company Law Tribunal had no authority to fasten the Corporate Debtors liability on the auction purchaser. In the case where the Sale is made under the SARFAESI Act, then after completing the sale process and issuance of the Sale Certificate, the Adjudicating Authority had no authority to pass an order U/S 60(5) of the Code.

# 40. It is further argued that the Bank requested the auction purchaser to analyse the situation before bidding. The Allahabad Bank continued informing the receipt of the notice under Section 9 of the Code. Thus the said 'letter' became Part of the terms of Sale. Despite becoming aware of all the dues and the Sale's terms, the Appellant proceeded to participate in the auction held on 20 December 2017 and succeeded in being the sole bidder. It is further argued that a sale certificate was issued on 9 February 2018 stating that the property was "free from all encumbrances known to the secured creditor listed below". Therefore, Sale's notice and subsequent correspondence became the Sale's terms, and the liabilities formed Part of the Sale and are no longer admissible against the Corporate Debtor. Further, the dues of EPF are an encumbrance on the unit/establishment. Under section 11 (2) of The Employees Provident Fund Act, the dues of EPF are encumbrance on the establishment and becomes the first charge thereupon.

# 41. It is also pertinent to mention that in the instant case, the entire process of auction sale was completed before the commencement of the Corporate Insolvency Process against the Corporate Debtor ASSIL. Given the law laid down by the Hon'ble Supreme Court in Embassy property (supra), it is clear that Resolution Professional cannot short-circuit the process, to bring a claim before the NCLT taking advantage of Section 60 (5) of the Code.

# 42. Therefore in the light of the statutory scheme, as culled out from various provisions of the IBC 2016, it is clear that whenever the Corporate Debtor has to exercise a right that falls outside the purview of IBC 2016, especially in the realm of public law, they cannot, through the Resolution Professional, take a bypass and go before the NCLT for the enforcement of such a right. In the instant case if there was any grievance either against the Order of issuing notice under Section 13 (2) or against the Act of taking possession of the secured assets under Section 13 (4) or further in relation to the auction sale of the property of Unit -1 of the corporate Debtor the Audicating Authority did not have the jurisdiction under the SARFAESI Act to pass any order in this regard. Given the law laid down by the Hon'ble Supreme Court in the Embassy property case, the Resolution Professional was not authorised to move an application under Section 60 (5) of the Code.

# 43. Even otherwise, the property' land, plant and machinery has been sold to the Appellant free from all encumbrances. The Appellant had acquired only Part of the property/Assets of the Corporate Debtor and not the Company itself. Therefore, the liabilities of the Company ASSIL had been wrongly fastened upon the Appellant. 

# 44. Based on the above discussion, I hold that the Adjudicating Authority under the I&B Code 2016 had no jurisdiction to determine a bona fide auction purchaser's liability under the SARFAESI Act's provisions; the same has been purchased before the commencement of CIRP of the Corporate Debtor. 

# 45. I further hold that while exercising its power u/s 60(5) of the Code, the Adjudicating Authority has exceeded its jurisdiction in determining a third party's liabilities, which had no role in the Corporate Debtor's Insolvency Resolution Process.

# 46. I further hold that the Adjudicating Authority erroneously determined the Sale of assets, precisely land, plant and machinery of Unit-1 of the corporate debtor 'ASSIL' as the Sale of a Company as a going concern, thereby making the purchaser liable for workmen's dues.

# 47. Based on the above discussion, the Appeal deserves to be allowed by setting aside the impugned Order. However, the majority view authored by separate judgement brother Hon'ble Acting Chairperson Justice B.L. Bhatt shall prevail.

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