2017 (3) TMI 487 - HC - VAT and Sales Tax

Recovery of tax dues under MVAT - priority of banks over statutory dues - The petitioner bank extended the financial assistance to the respondent No.2 - Company and in order to secure the finances the Company mortgaged its immovable property as well as hypothecated its assets in favour of petitioner-bank - default in repayment of loan - auction sale - The petitioner contends that the petitioner bank being a secured creditor has preferential claim over the secured assets and is entitled to take appropriate steps for realization of the amount due and recoverable from Respondent No.2 Company - Held that - in view of provisions of Section 529A of the Companies Act, priority is given to the dues of the secured creditor and the workers over the statutory charge claimed by the State - the secured creditors fall under two categories; those who desire to go before the Company Court and those who like to stand outside the winding up. It is open for the petitioner to stand outside the winding up proceedings and claim enforcement of its Security Interest. If the petitioner instead of deciding to stand outside preferred to go before the Company Court for decision, it would become necessary to relinquish its security in accordance with Insolvency Rules mentioned in Section 529. The petitioner is a Secured Creditor in accordance with IInd clause u/s 529-A(i) (b) read with proviso (c) to Section 529 (I) having overriding preferential claim and opts to stand outside winding up to realize its security. In view of clause (c) to the proviso to Section 529 (I) the priority of the Secured Creditor who stand outside the winding up is confined to workmens portion as defined in Section 529 (iii) (c). The petitioner who stands outside the winding up proceedings in view of provisions of Section 529-A can surely have priority over the claim of the State in respect of statutory dues. The petitioner bank has a priority claim over the statutory dues claimed by respondent no.1. - petition allowed - decided in favor of petitioner.

Issues Involved:
1. Quashment of notices issued by the Assistant Commissioner of Sales Tax.
2. Preferential claim of a secured creditor over statutory dues.
3. Applicability of Section 529A of the Companies Act, 1956 in liquidation cases.
4. Interpretation of Section 35 of the SARFAESI Act, 2002 and its precedence over state tax laws.
5. Impact of Section 26E of the SARFAESI Act, 2002 on priority claims.

Issue-wise Detailed Analysis:

1. Quashment of Notices Issued by the Assistant Commissioner of Sales Tax:
The petitioner, a bank, sought the quashment of notices dated 12th August 2013 and 19th September 2013 issued by the Assistant Commissioner of Sales Tax under Section 33(1) of the Maharashtra Value Added Tax Act, 2002 (MVAT Act). The petitioner argued that as a secured creditor, it had a preferential claim over the secured assets and was entitled to recover the dues from the respondent company, which was under liquidation.

2. Preferential Claim of a Secured Creditor Over Statutory Dues:
The petitioner contended that the provisions of the SARFAESI Act override the MVAT Act, as the company was under liquidation. The bank argued that under Section 529A of the Companies Act, 1956, debts due to secured creditors rank pari passu with workmen’s dues and are to be paid in priority to all other debts. The bank had initiated recovery proceedings under the SARFAESI Act and had taken possession of the secured assets, which were subsequently sold in a public auction.

3. Applicability of Section 529A of the Companies Act, 1956 in Liquidation Cases:
The court noted that Section 529A of the Companies Act gives priority to the dues of secured creditors and workmen over other statutory dues. The respondent company was under liquidation, and the bank, as a secured creditor, opted to stand outside the liquidation proceedings to enforce its security interest. The court referred to the judgment in the case of SICOM Ltd., which upheld the priority of secured creditors’ claims over state dues in liquidation cases.

4. Interpretation of Section 35 of the SARFAESI Act, 2002 and Its Precedence Over State Tax Laws:
The court examined the contention that Section 35 of the SARFAESI Act, which provides for the overriding effect of the Act, does not override Section 38C of the Bombay Sales Tax Act, 1959. The court referred to the Supreme Court judgment in Central Bank of India v. State of Kerala, which held that the DRT Act and the SARFAESI Act do not create a first charge in favor of banks and financial institutions, and state tax laws have precedence over these Acts. However, the court distinguished the present case by emphasizing the applicability of Section 529A of the Companies Act in liquidation cases.

5. Impact of Section 26E of the SARFAESI Act, 2002 on Priority Claims:
The court acknowledged the statutory recognition of the priority claim of secured creditors introduced by Section 26E of the SARFAESI Act, 2002, which provides that secured creditors have priority over all other debts, including taxes payable to the government. The court referred to the Full Bench judgment of the Madras High Court in Assistant Commissioner (CT) Chennai v. Indian Overseas Bank, which held that the amended law would govern the rights of parties even in pending cases.

Conclusion:
The court concluded that the petitioner bank, as a secured creditor, had a priority claim over the statutory dues claimed by the state. Consequently, the impugned notices dated 12th August 2013 and 19th September 2013 were quashed, and the related notices issued to the Reserve Bank of India were set aside. The rule was made absolute, and no order as to costs was passed.

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