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2006 (4) TMI 258 - HC - Companies LawEnforcement of Security Interest - banking business - sale proceeds - conflict u/s 38C of the Bombay Sales Tax Act, 1959 and section 35 of the Securitisation Act - Securitisation Act being Central Act must prevail - HELD THAT - There being no provision in the Securitisation Act providing for first charge in favour of the banks, section 35 of the Securitisation Act cannot be held to override section 38C of the Bombay Sales Tax Act, 1959 that specifically provides that the liability under the said Act shall be the first charge. The overriding provision contained in section 38C is only subject to the provision of the first charge in the Central Act holding the field. The case of the Bank is not covered by the expression, subject to any provision regarding first charge in any Central Act for the time being in force and that being the position, section 38C is not overridden by section 35 of the Securitisation Act. We hold that section 35 of the Securitisation Act has no effect whatsoever in the operation of section 38C of the Bombay Sales Tax Act. Section 35 of the Securitisation Act does not override section 38C of the Bombay Sales Tax Act and, therefore, based on section 35 of the Securitisation Act, the Bank does not get precedence or for that matter priority over the statutory first charge under section 38C of the Bombay Sales Tax Act. Rather the statutory first charge under section 38C of the Bombay Sales Tax Act has precedence over the Bank s charge based on contract. It what we have discussed, we find no substance in any of the contentions raised by the counsel for the Bank. It is not in dispute that before the process was initiated by the Bank u/s 13 of the Act by issuance of notice dated 20-12-2004, the sales tax authorities had already attached the properties of the company for recovery of sales tax dues. Despite the recovery process for outstanding sales tax dues having been initiated by the sales tax authorities who had a first charge u/s 38C of the Bombay Sales Tax Act, the Bank in grossly illegal manner proceeded u/s 13 of the Securitisation Act and sold the property of the company for recovery of its outstanding dues. The action of the Bank is wholly illegal and unauthorised. The result is that we find no merit in the writ petition. It is dismissed with cost which we quantify at Rs. 10,000. We also direct the petitioner to deposit the sale proceeds amounting to Rs. 66,31,001 with the respondent No. 2 within four weeks from today.
Issues Involved:
1. Conflict between Section 38C of the Bombay Sales Tax Act, 1959 and Section 35 of the Securitisation Act, 2002. 2. Priority of sales tax dues over secured creditors. 3. Legality of the Bank's recovery process under the Securitisation Act. Issue-wise Detailed Analysis: 1. Conflict between Section 38C of the Bombay Sales Tax Act, 1959 and Section 35 of the Securitisation Act, 2002: The primary contention from the Bank was that the Securitisation Act, being a Central Act and enacted later, should prevail over the Bombay Sales Tax Act. Section 35 of the Securitisation Act states that its provisions will have effect notwithstanding anything inconsistent contained in any other law. However, Section 38C of the Bombay Sales Tax Act provides that any amount of tax, penalty, interest, or any other sum payable by a dealer under the Act shall be the first charge on the property of the dealer, subject to any provision regarding first charge in any Central Act. The court concluded that Section 13 of the Securitisation Act does not create a first charge but provides a mechanism for the realization of security without court intervention. Therefore, Section 35 of the Securitisation Act does not override Section 38C of the Bombay Sales Tax Act. 2. Priority of sales tax dues over secured creditors: The court examined whether the statutory first charge created under Section 38C of the Bombay Sales Tax Act has precedence over the Bank's charge based on contractual mortgage. It was held that the statutory first charge under Section 38C has precedence over the Bank's charge. The court referred to the Supreme Court's judgment in State Bank of Bikaner & Jaipur, which held that a statutory first charge has precedence over an existing mortgage. Similarly, the court noted that Section 38C of the Bombay Sales Tax Act provides for the first charge on the property of the dealer in respect of sales tax liability, which overrides the Bank's secured interest. 3. Legality of the Bank's recovery process under the Securitisation Act: The Bank initiated recovery proceedings under Section 13 of the Securitisation Act and sold the properties of the company to recover its dues. The court found that the sales tax authorities had already attached the properties for recovery of sales tax dues before the Bank initiated its process. The court held that the Bank's action was illegal and unauthorized as the sales tax authorities had a statutory first charge under Section 38C of the Bombay Sales Tax Act. The court directed the Bank to deposit the sale proceeds amounting to Rs. 66,31,001 with the sales tax department and dismissed the writ petition with costs. Conclusion: The court concluded that Section 35 of the Securitisation Act does not override Section 38C of the Bombay Sales Tax Act. The statutory first charge for sales tax dues has precedence over the Bank's secured interest. The Bank's recovery process under the Securitisation Act was deemed illegal, and the Bank was directed to deposit the sale proceeds with the sales tax department. The writ petition was dismissed with costs.
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