2017 (7) TMI 507 - HC - VAT and Sales Tax

Attachment of the schedule mentioned property owned by the assessee in default - amendment brought by insertion of section 26E in Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Held that - secured creditor would have priority over all other debts and Government dues, including taxes, cesses etc., due to the State Government, Central Government or Local Authority. Therefore the impugned order of attachment is liable to be set aside - petition allowed - decided in favor of petitioner.

Summary

Issues:
1. Priority of Charge between Financial Institution and Government Department over mortgaged property.
2. Status and Rights of a Third-Party Purchaser of the mortgaged property.

Issue 1: Priority of Charge between Financial Institution and Government Department over mortgaged property

The petitioner, an Asset Reconstruction Company, challenged an order attaching a property owned by a defaulting party, citing the amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The amendment, through the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, prioritized secured creditors' rights to realize debts over other dues, including government taxes. The matter was referred to a Full Bench to resolve the conflicting views. The Full Bench, including the judge, ruled in favor of the secured creditor, emphasizing the amended law's priority of secured debts over government dues. The introduction of Section 31B clarified the priority of secured creditors in realizing debts, even in pending cases. This decision favored the financial institution as a secured creditor with a mortgage on the property.

Issue 2: Status and Rights of a Third-Party Purchaser of the mortgaged property

The Full Bench's decision primarily focused on the rights of secured creditors and the priority of their claims over government dues. It clarified that the amendment's provisions, particularly Section 31B, ensured that secured creditors had priority in realizing debts through the sale of assets with security interest. This ruling addressed the concerns related to auction sales conducted by secured creditors and reaffirmed the priority given to them in recovering debts. The judgment concluded that the secured creditor's rights were paramount, emphasizing the importance of the amended law in governing the rights of parties involved in such cases. Consequently, the decision favored the secured creditor over other debts and government dues, setting aside the impugned attachment order while allowing the government department to pursue alternative recovery methods under the Tamil Nadu General Sales Tax Act.

In summary, the judgment clarified the priority of secured creditors over government dues, resolving the issues related to the rights of financial institutions and third-party purchasers in cases involving mortgaged properties. The ruling underscored the significance of the amended law in establishing the supremacy of secured creditors in realizing debts and emphasized the need for adherence to the amended provisions in pending cases.