2020 (1) TMI 1613 - HC - Indian Laws

Recovery of loan - Recovery of tax dues / revenue payable - 'priority' and 'first charge' - Secured Creditor - preference/priority in getting the debts - Auction of property - Applicability of provisions of Section 26E of the SARFAESI Act introduced with effect from 01.09.2016 - Notification was issued later - the primary contention raised by the Appellant is that the above provision has not come into effect. The next contention is that it cannot have retrospective effect, having allegedly brought into effect only from 01.09.2016; whereas the 'Revenue Recovery Certificate' was issued by the District Collector much prior to that date i.e. on 20.08.2015. HELD THAT - the provision (Section 26E) may not be applicable in the case of payment already effected pursuant to such steps by the State Government on request of other creditors as that clock cannot put back to 'zero' to start afresh. Unlike this, even in a case where the Bank has not taken any steps under the SARFAESI Act in respect of the security interest created much earlier and even if, the State has initiated the recovery proceedings invoking the machinery under the RR Act, later, if steps are taken by the Bank, projecting their claim, then the 'payment' cannot be effected to any others ignoring the 'priority' by the secured creditor. This being the position, the contention raised by the Appellant that Section 26E of the SARFAESI Act is prospective and hence, not applicable to the case in hand, since the 'Revenue Recovery Certificate' was issued prior to introduction of Section 26E does not hold any water and it stands repelled. Applicability of amended provisions - effective date - The Central Government consciously issued a notification bringing the above provisions declaring the priority rights by way of notification dated 01.09.2016 bearing No. S.O. 2831 (E), in the statute book and as such, priority of the secured creditors are declared and notified insofar as RDB Act is concerned. Whether non-issuance of notification in respect of Section 26E of the SARFAESI Act, as dealt with Section 18 of the Amendment Act 44 of 2016, was a conscious decision or whether it was an inadvertent omission, lingered in our minds, which persuaded us to probe further. Ultimately, it has been noted that the Central Government has now issued a notification bearing No. S.O. 4619/E dated 26.12.2019 , published in the Gazette of India dated 26.12.2019 to the effect that Sections 17 to 19 of the SARFAESI Act (Act 44 of 2016) will come into force from 24.01.2020. Thus, it is explicitly clear that Section 26E of the SARFAESI Act was never brought into force on 01.09.2016 and it is being brought into force only with effect from 24.01.2020 In the above circumstances, we find that the ruling rendered by the learned Single Judge, observing in paragraph-7 that Section 26E of the SARFAESI Act has already come into effect from '01.09.2016' is a factual mistake. This being the position, the finding given with reference to the said provision and the further declaration/observation in 'paragraph-9' are declared as not correct or sustainable and hence, it is set aside.

Summary

Issues Involved:

1. Relative/preferential rights to proceed against the property of the Borrower.
2. Applicability and effect of Section 26E of the SARFAESI Act.
3. Distinction between 'priority' and 'first charge'.
4. Validity of the auction notice dated 14.09.2018.
5. Retrospective or prospective application of Section 26E.

Issue-wise Detailed Analysis:

1. Relative/Preferential Rights to Proceed Against the Property of the Borrower:
The primary issue in this case was the relative/preferential rights to proceed against the property of the Borrower, who had taken loans from both the Bank of Baroda (Secured Creditor) and Chhattisgarh State Co-operative Marketing Federation Limited (Creditor). The learned Single Judge had ruled in favor of the Secured Creditor, granting them preference/priority in debt satisfaction over other creditors, including the State, by virtue of Section 26E of the SARFAESI Act.

2. Applicability and Effect of Section 26E of the SARFAESI Act:
The core legal contention revolved around Section 26E of the SARFAESI Act, which grants priority to secured creditors over all other debts, including taxes and revenues payable to the Government. The learned Single Judge had observed that Section 26E came into effect from 01.09.2016, thereby giving the Bank priority over the State's claims. However, this judgment was challenged on the grounds that Section 26E had not been notified in the Official Gazette and thus had not come into force as of the date of the judgment.

3. Distinction Between 'Priority' and 'First Charge':
The Appellant argued that there is a fundamental difference between 'priority' and 'first charge'. Section 26E of the SARFAESI Act uses the term 'priority' and not 'first charge'. The Appellant contended that while secured creditors may have priority, this does not preclude the State or other creditors from pursuing recovery simultaneously. The learned Single Judge did not delve deeply into this distinction, leaving it open for future consideration.

4. Validity of the Auction Notice Dated 14.09.2018:
The Bank of Baroda had challenged the auction notice dated 14.09.2018 issued by the Revenue Authorities, arguing that it was detrimental to their rights as a secured creditor. The learned Single Judge had set aside the auction notice, emphasizing the Bank's priority under Section 26E. However, the Appellant contended that the Revenue Recovery Certificate issued by the District Collector was not challenged, and thus the auction notice should not have been set aside.

5. Retrospective or Prospective Application of Section 26E:
The Appellant argued that Section 26E could not have retrospective effect and should not apply to the Revenue Recovery Certificate issued on 20.08.2015, prior to the alleged effective date of Section 26E. The judgment clarified that Section 26E starts with a 'non-obstante clause', giving it overriding effect over other laws. However, it was ultimately found that Section 26E was not notified and thus had not come into force as of 01.09.2016. The Central Government issued a notification on 26.12.2019, bringing Section 26E into force from 24.01.2020.

Conclusion:
The High Court concluded that the learned Single Judge's observation that Section 26E of the SARFAESI Act had come into effect from 01.09.2016 was factually incorrect. Consequently, the finding based on this provision was set aside. However, since the auction did not take place and the Bank had already obtained physical possession of the property, the Bank was free to take appropriate steps in accordance with the law. The distinction between 'priority' and 'first charge' was left open for future consideration. The writ appeal was allowed to the extent of setting aside the learned Single Judge's erroneous observations regarding Section 26E.