2020 (8) TMI 921 - HC - Indian Laws

Recovery of dues - priority of settlement of dues - Reluctance to transfer property - execution proceedings initiated by Recovery Officer (RO) pursuant to Decree/Recovery Certificate (RC) obtained by Punjab National Bank (PNB or Secured Creditor), inter alia on the ground that the erstwhile owner/borrower has to pay certain dues to the Central Excise Department. Whether the dues of the secured creditor are to be paid in priority, by sale of secured assets specifically charged to it, vis- -vis the arrears of outstanding dues under the Central Excise Act, 1944? - HELD THAT - The undisputed legal position which emerges is that a conjoint reading of the relevant provisions of all the three enactments, i.e. Recovery Act, 1993, Securitisation Act, 2002 and Central Excise, 1944 would show that the secured creditor shall have a prior right of recovery from the sale of the secured assets, over and above the right of Central Excise. Further, in UNITED BANK OF INDIA VERSUS ABHIJIT TEA CO. (P.) LTD. 2000 (9) TMI 928 - SUPREME COURT and NAHAR INDUSTRIAL ENTERPRISES LTD. AND OTHERS VERSUS HONG KONG SHANGHAI BANKING CORPORATION AND OTHERS 2009 (7) TMI 1193 - SUPREME COURT , Recovery Act, 1993 has been noticed to be a procedural Act, since, it precisely lays down, the manner and procedure of recovery of debts due to Banks and Financial Institutions. Since both Recovery Act, 1993 and Securitisation Act, 1993 are procedural in nature and complimentary to each other, therefore, the ratio of law, with regard to the applicability of principle of retroactive operation of the provisions of the Securitisation Act, 2002 would apply with equal force to the amendment under the Recovery Act, 1993 as well, and the above judgments would apply with equal force, to the amendment brought under the Recovery Act, 1993 as well. There are no hesitation in concluding that the argument of the Central Excise, that the demands of Central Excise having been made/confirmed earlier than the aforesaid amendments under the aforesaid enactments which would have prospective operation in nature, and thus the demands under the Central Excise Act, 1944 would have precedence, is misplaced and hence is rejected. It is well settled that, it is only when a charge is created by act of parties or exists by operation of law, upon the property, that question of priority arises to be determined. In the present case, the property in question had never been attached nor a charge was created by the Central Excise. Further, there is no provision which provides for creation of charge upon immovable property of assessee by operation of law. Therefore, Central Excise had no charge upon the property in question. Consequently, it had no locus to thwart/negate the entitlement of the secured creditor to sell the secured asset or deny the auction purchaser to enjoy natural fruits of the sale, upon which mortgage has been created in favour of secured creditor by creation of mortgage in terms of section 58 of the Transfer of Property Act, 1882, which mortgage has been upheld by DRT on issuance of Recovery Certificate - on account to conspicuous absence of charge or attachment upon the secured asset in favour of Central Excise in the manner so provided under the Act, 1944, it could not even have claimed priority of charge vis- -vis the claim of the secured creditor. Issue is answered in affirmative, and it is held, that the dues of the secured creditor are to be paid in priority by sale of secured assets specifically charged to it vis- -vis the arrears of outstanding dues under the Central Excise Act, 1944. Charges being claimed by various third parties, including Government and Semi-Government entities upon the property (secured asset) by enforcing their claim/s, of the dues recoverable from the erstwhile owner/borrower of the property - HELD THAT - These are claimed by way of act of attachment being effected upon the secured asset, either pursuant-to dues being claimed under various enactments, or through the process of recovery where attachment orders are passed by the courts/authorities, on the application of 'the claimants or by operation of law. These encumbrances shall include, dues which are claimed, by third party entities like Central Excise, Government dues, Semi Government, dues of private individuals seeking attachment on the property of the defaulter/borrower etc. It would thus be fruitful to discuss these claims broadly by their respective classification. It is to be noticed that the rights of the auction purchaser, on purchasing the secured asset, are virtually derivative rights from the secured creditor. Thus, if the auction purchaser has purchased the property from the secured creditor, it is the secured creditor which has exercised its right of priority to sell the secured asset to recover and appropriate its dues and hence the auction purchaser cannot be called upon to pay the dues of the previous owner/borrower. While the banks proceed to sell the mortgaged property to recover the secured debts, it is noticed that due to attachments orders obtained by the agencies upon the secured asset/s, it does not get adequate buyers because of the encumbrance of attachment. If at all, it is able to sell it, the auction purchaser faces difficulty in getting the property transferred in its favour. Such attachments upon the property, which are obtained by the agencies or such other similarly placed entities, from the courts or arbitral tribunals are all unsecured attachments. Such unsecured debts/claims cannot have precedence over the secured debts by virtue of prior mortgage rights of having been created in favour of the secured creditor by the owner/mortgagor and consequently cannot be treated as an encumbrance either for the secured creditor or for the auction purchaser. The auction purchaser who has purchased such property from the secured creditor cannot be put to any disadvantageous position because of the such third party attachments. Section 48 of the Act, 1882 would protect the right of the secured creditor and the also the subsequent rights created in favour of the auction purchaser purchasing the property from such secured creditor - an auction purchaser purchasing such property from the secured creditor would not be liable for the dues being claimed by such plaintiff nor can he interject right of enjoyment of the property purchased by the auction purchaser, merely on the basis of an attachment order for an unsecured debt. Even section 48 of the TP Act, 1882 would also protect the right of the secured creditor in whose favour prior mortgage rights exist and the consequent right of the auction purchaser from such attachments upon the secured asset. Dues which emanate but of utilization of the property (secured asset) itself by the erstwhile occupier/owner/borrower, that are sought to be recovered from the auction purchaser - HELD THAT - The most common claim is that of the Electricity Department against the auction purchaser towards unpaid bills of supply/use of electricity by the previous occupier/owner of the secured asset. Hence,' it requires to be dealt with specifically. It is to be noticed that it is consequent upon purchase of property in a public auction conducted by or on behalf of a secured creditor, that the auction purchaser realizes that previous electricity dues, consumed by the erstwhile owner has not been cleared due to which, re-connection or fresh electricity connection is denied. The Electricity Department, raises a demand and a condition, of clearance of previous dues, before the subsequent purchaser could claim a connection or a restoration thereof, which leads to an issue as to whether the auction -purchaser would be liable to clear the dues of the electricity consumed by the previous owner/occupier of the property. As regards, other dues are concerned including transferable and recoverable statutory dues, pending installments due and payable to the allotting agency, Internal and External Development Charges payable to Development Authority, Extension fee/non-construction charges. Water and Sewerage dues etc., which are directly emanating out of the usage of the -property in question, would also be payable by the auction purchaser, where the properties are being sold on as is where is basis . The issue is answered in negative and it is held petitioner being successful auction purchaser, pursuant to an auction conducted by DRT under Recovery Act, 1993 would not be liable to pay the dues being claimed by Central Excise originally payable by the erstwhile owner/assessee/borrower. Whether respondent No. 3 could have refused the transfer of the property in question in the name of the petitioner? - HELD THAT - A perusal of the writ petition would reveal that petitioner submitted request letter dated 04.10.2019, vide diary No. 3921 to Respondent No. 3, pursuant to which, it issued the impugned letter dated 15.10.2019 (P-3), vide which transfer of property is sought to be resisted by Respondent No. 3 predominantly on five grounds. The first one being, that Urban Ceiling Officer Ludhiana vide letter dated 1275 dated 28.09.1987, has restricted the transfer of the property in question, and the decision in that regard is sought to be intimated to it. Petitioner has replied to the same, vide letter dated 16.10.2019 (P-4), stating that Urban Ceiling Law, is not applicable to the property in question. Since, Urban Land (Ceiling and Regulation) Act, 1976, was repealed by the Parliament by passing Urban Land (Ceiling and Regulation) Repeal Act, 1999 (Act No. 15 of 1999), therefore, the same cannot be an objection to resist the transfer of the property in favour of petitioner. The respondent No. 3-GLADA is directed, that in case if it insists on compulsory registration in-spite of the aforesaid statutory provision, to decide the issue, after giving an opportunity of hearing to the petitioner and passing a speaking and reasoned order within four (04) weeks from the receipt of certified copy of the order, failing which the competent authority, shall be liable for proceedings for contempt under the Contempt of Courts Act, 1971. Petition allowed.

Summary

Issues Involved:
1. Priority of dues between secured creditors and Central Excise.
2. Liability of auction purchaser for dues of the erstwhile owner.
3. Legality of refusal by GLADA to transfer the property.

Issue-wise Detailed Analysis:

Issue No. 1: Priority of Dues
The court examined the provisions of the Recovery of Debts and Bankruptcy Act, 1993 (Recovery Act, 1993), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act, 2002), and Central Excise Act, 1944. Section 31B of the Recovery Act, 1993, and Section 26E of the Securitisation Act, 2002, both provide that secured creditors have priority over government dues. Section 11E of the Central Excise Act, 1944, also recognizes the priority of secured creditors. The court concluded that the secured creditor's right to recover dues from the sale of secured assets has priority over Central Excise dues. The argument that Central Excise dues crystallized before the amendments and thus should have priority was rejected, as the amendments apply to all existing and pending recoveries. The court also noted that Central Excise had not attached the property as required under Section 11 of the Central Excise Act, 1944, and thus had no enforceable charge.

Issue No. 2: Liability of Auction Purchaser
The court held that an auction purchaser is not liable for the dues of the erstwhile owner. The court cited precedents such as Union of India v. SICOM Ltd. and M/s. Rana Girders Ltd. v. Union of India, which established that statutory dues like Central Excise do not transfer to the auction purchaser unless explicitly stated in the sale notice. The court also noted that the petitioner purchased the property without notice of any charge from Central Excise, further reinforcing that the petitioner is not liable for the previous owner's dues. The court emphasized that the auction purchaser's title derives from the secured creditor, which has priority over other claims.

Issue No. 3: Refusal by GLADA to Transfer Property
GLADA refused to transfer the property based on several grounds: Urban Ceiling restrictions, Central Excise dues, lack of partnership deed, original sale certificate, and unregistered sale deed. The court found these grounds insufficient:
- The Urban Land (Ceiling and Regulation) Act, 1976, was repealed, making this ground invalid.
- Central Excise dues cannot be claimed from the petitioner as established in Issues 1 and 2.
- The petitioner, as an auction purchaser, is not expected to possess the partnership deed of the previous owner.
- The petitioner had already provided the original sale certificate.
- Regarding the unregistered sale deed, the court directed GLADA to decide on the necessity of registration within four weeks, considering Section 17(2)(xii) of the Registration Act, 1908, which exempts sale certificates from compulsory registration.

Conclusion:
The court allowed the writ petition, directing GLADA to transfer the property to the petitioner, subject to the decision on the registration issue. The court appreciated the assistance provided by the counsels in resolving the case.