2018 (10) TMI 969 - HC - Central Excise

Attachment of property - Recovery of dues - same property was already attached by bank against Non-performing Assets - Whether the Financial Institution, which is a secured creditor, or the department of the Government concerned, would have the Priority of Charge over the mortgaged property in question, with regard to the tax and other dues? - Held that - Section 31-B of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 clearly makes the issue raised between the petitioner and the second respondent clear that the rights of the secured creditors to realise secured debts due and payable to them by sale of assets over which the security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority - decided in favour of the financial institution, which is a secured creditor having the benefit of the mortgaged property. What are the status and the rights of a third party purchaser of the mortgaged property in question? - Held that - The question is stated to relate only to auction sales, which may be carried out in pursuance to the rights exercised by the secured creditor having a mortgage of the property. This aspect is also covered by the introduction of Section 31B, as it includes secured debts due and payable to them by sale of assets over which security interest is created. The petitioner being a bona fide purchaser has purchased the property brought by the bank in public auction held on 02.05.2017. Moreover, the crucial aspect to be borne by us is the date of attachment of the property in question by the bank on 22.07.2008 - When the property in question was already attached by the fourth respondent bank after classifying the account of the original borrower as Non-Performing Asset and subsequently the property was also attached on 22.07.2008, almost six years ago, the property in question has disappeared from the scope of attachment to be made by the second respondent, the reason being that the charge was created only on 22.12.2014. The Sub Registrar, Kinathukadavu, Coimbatore District, third respondent herein, is directed to remove all the entries made in respect of Survey No.80/2, Nallatipalayam Village, Kinathukadavu Taluk, in favour of the second respondent by document No.27/2014, dated 29.12.2014 - petition allowed.

Summary

Issues:
1. Priority of charge between secured creditors and government departments.
2. Status and rights of a third-party purchaser of mortgaged property.

Analysis:

Issue 1: Priority of charge between secured creditors and government departments

The Writ Petition sought a Mandamus to remove a charge created in favor of the Central Excise Department over a property already mortgaged to a bank. The petitioner argued that the charge created by the Central Excise Department was invalid as it was made after the property was attached by the bank due to default by the borrower. The petitioner relied on legal provisions such as Section 31-B of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions Act, 2016, which prioritize the rights of secured creditors over government dues. The petitioner also cited a Full Bench judgment of the High Court emphasizing the same principle. The petitioner contended that the charge created by the Central Excise Department was without jurisdiction and should be removed.

The Superintendent of Central Excise, the second respondent, opposed the petition, arguing that charges created under the Central Act and Customs Act would persist until the tax arrears are cleared by the property purchaser. The second respondent highlighted Section 100 of the Transfer of Property Act to support this argument. The second respondent referred to Section 31B of the Act, emphasizing the priority of secured creditors in realizing debts over government dues. The Full Bench of the High Court had previously ruled in favor of secured creditors over government departments in terms of charge priority.

The Court analyzed the legal provisions and previous judgments to determine the priority of charges between secured creditors and government departments. It held that the rights of secured creditors to realize debts have priority over government dues, including taxes and revenues. The Court emphasized that the property in question had been attached by the bank before the charge was created by the Central Excise Department, making the charge invalid. The Court concluded that the charge created by the Central Excise Department should be removed, affirming the priority of secured creditors over government departments in such cases.

Issue 2: Status and rights of a third-party purchaser of mortgaged property

The Court also addressed the status and rights of a third-party purchaser of mortgaged property. It clarified that a bona fide purchaser who acquires property through a public auction held by a secured creditor has valid rights over the property. The Court considered the date of attachment of the property by the bank and emphasized that the property had already been attached before the charge by the Central Excise Department was created. The Court highlighted that the property had not been sold without following due process, including public auction. Consequently, the Court allowed the Writ Petition, directing the removal of the charge created by the Central Excise Department on the property.

In conclusion, the judgment upheld the priority of secured creditors over government departments in realizing debts and affirmed the rights of a third-party purchaser of mortgaged property acquired through a legitimate public auction process.