2022 (9) TMI 163 - HC - VAT and Sales Tax

Recovery of dues - priority/precedence of dues - does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government under the BST Act/MVAT Act/MGST Act to appropriate the amount realized by the sale of a secured asset? - whether dues accruing to a department of the Government ought to be repaid first by reason of first charge created over any property by operation of law (viz. the legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor? - HELD THAT - Bare perusal of the 2016 Amending Act would show that the dues of the Central/State Governments were in the specific contemplation of the Parliament while it amended the RDDB Act and the SARFAESI Act, both of which make specific reference to debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority and ordains that the dues of a secured creditor will have priority , i.e., take precedence - The rights of such of the first charge holders accorded by several legislations enacted by the State, having regard to the language in which section 26E is couched, would rank subordinate to the right of the secured creditor as defined in section 2(1)(zd) subject, of course, to compliance with the other provisions of the statute. Acceptance of the contra-arguments of learned counsel for the State/respondents would undo what the Parliament has chosen to do. The RDDB Act and the SARFAESI Act are Central Acts. If any provision therein is discerned to be seemingly inconsistent with any provision in a State legislation, reconciliation of the same ought to be attempted failing which the Central Acts will prevail over the State legislations, in view of the principle of repugnancy that Article 254 of the Constitution contemplates - Subject to compliance of the terms of Chapter IV-A, section 26E of the SARFAESI Act would, thus, override any provision in the MGST Act and the BST Act in case of a conflict with the SARFAESI Act. There are no hesitation to hold that the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I B Code would rank superior to the dues of the relevant department of the State Government. Whether the provisions, inter alia, according priority in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act prospective? - HELD THAT - Actions taken under Chapter III of the SARFAESI Act including measures to take over possession of the secured asset prior to Chapter IV-A becoming operational, i.e., without CERSAI registration of the security interest sought to be enforced, could be challenged as ultra vires the SARFAESI Act itself. If such a challenge were to succeed, there could be sort of a cloudburst of complications. A reading that Chapter IV-A applies prospectively would, however, save all such exercises of enforcement of unregistered security interest, thereby not being liable to interdiction on the ground of absence of registration of the security interest upon a challenge being thrown by a defaulting borrower. The provisions of Chapter IV-A of the SARFAESI Act would have application prospectively from the date the same was brought into force, i.e., January 24 2020. Whether section 31B of the RDDB Act can be pressed into service for overcoming the disability that visits a secured creditor in enforcing its security interest under the SARFAESI Act upon such creditor s failure to register the security interest in terms of the amendments introduced in the SARFAESI Act? - HELD THAT - A secured creditor, finding that it is disabled from obtaining the benefit of priority in terms of section 26E of the SARFAESI Act for want of CERSAI registration, cannot fall back on section 31B of the RDDB Act to claim priority - the overwhelming factor of determination of a lis by the DRT has to be given its due worth and hence, the benefit of priority that section 31B envisages is for a secured creditor who institutes proceedings under the RDDB Act and is successful in having an interim or final determination in its favour that a sum is due and payable (in section 31B) as distinguished from the debts due (in section 26E). Section 31B of the RDDB Act being a substantive provision, it cannot be invoked by a secured creditor faced with the disability posed by section 26E of the SARFAESI Act - without recourse having been taken to the procedure envisaged in the RDDB Act for recovery of its dues and without there being a determination of its claim by the DRT to the effect that any sum due from the borrower is payable to it, a secured creditor is not entitled to invoke the provisions of section 31B. Whether the priority of interest contemplated by section 26E of the SARFAESI Act could be claimed by a secured creditor without registration of the security interest with the Central Registry? - HELD THAT - On the face of the express provisions in sections 26D and 26E of the SARFAESI Act and in the absence of any discussion on the object of introduction of Chapter IV-A of the SARFAESI Act by the Division Bench in ASREC (India) Ltd. 2019 (12) TMI 633 - BOMBAY HIGH COURT , we are constrained to hold that a law has been declared which runs clearly contrary to the statutory mandate and, therefore, paragraph 21 of such decision does not represent the correct position of law. The other Division Bench in STATE BANK OF INDIA AND ORS. VERSUS STATE OF KERALA AND ORS. 2019 (7) TMI 1684 - KERALA HIGH COURT may not have considered sections 26D and 26E of the SARFAESI Act in such great depth in the absence of proper assistance from the parties while holding that even if the secured creditor does not register the mortgage under section 26D of the SARFAESI Act, such alleged non-registration, in view of the Division Bench s discussion on section 31B of the RDDB Act, would not affect the legal position on the issue of priority. The views expressed by the Division Benches in ASREC (India) Ltd. and State Bank of India, on the question under consideration are not the correct exposition of law and, to that extent, stand overruled. When, and if at all, can it be said that the statutory first charge under the State legislation, viz. the BST Act, the MVAT Act and the MGST Act, as the case may be, stands displaced having regard to introduction of Chapter IV-A in the SARFAESI Act from 24th January 2020? - HELD THAT - Unless attachment of the defaulter s immovable property is ordered in the manner ordained by the MLR Code and as prescribed by the MRLR Rules and due proclamation thereof is made, even the creation of charge on such immovable property may not be of any real significance, not to speak of demonstrating with reference to evidence that the transferee had actual or constructive notice of such charge. If there has been an attachment and a proclamation thereof has been made according to law prior to 24th January 2020 or 1st September 2016, i.e., the dates on which Chapter IV-A of the SARFAESI Act and section 31B of the RDDB Act, respectively, were enforced, the department may claim that its dues be paid first notwithstanding the secured dues of the secured creditors; but in the absence of an order of attachment being made public in a manner known to law, i.e., by a proclamation, once Chapter IV-A of the SARFAESI Act or section 31B, as the case may be, has been enforced, the dues of the secured creditor surely would have priority . If the immovable property of the defaulter is shown to have been attached in accordance with law prior to Chapter IVA of the SARFAESI Act, or for that matter section 31B of the RDDB Act, being enforced, and such attachment is followed by a proclamation according to law, the priority accorded by section 26E of the former and section 31B of the latter would not get attracted. Whether an auction purchaser of a secured asset would be liable to pay the dues of the department in order to obtain a clear and marketable title to the property having purchased the same on as is where is and whatever there is basis ? - HELD THAT - Notwithstanding the duty of the authorized officer to indicate in the sale advertisement inviting bids the encumbrance(s) attached to the immovable property, i.e., the secured asset, as known to the secured creditor, if at all any detail in regard to such encumbrance(s) is not indicated but the sale is expressly made on as is where is, whatever there is basis , the transferee shall be duty bound to deposit money for discharge of the encumbrance(s) provided, of course, that such liability may be overcome if he is in a position to disprove the claim of the department that he had no constructive notice of the charge, far less actual notice. Petition disposed off.

Summary

Issues Involved:
1. Priority of dues between secured creditors and government departments.
2. Applicability and effect of Section 26E of the SARFAESI Act and Section 31B of the RDDB Act.
3. Retrospective or prospective application of Section 26E of the SARFAESI Act.
4. Registration requirements for secured creditors to claim priority.
5. Impact of attachment orders by government departments on secured creditors' claims.
6. Auction purchasers' liability for government dues.

Detailed Analysis:

Priority of Dues Between Secured Creditors and Government Departments
The primary issue was whether secured creditors or government departments (under the BST Act/MVAT Act/MGST Act) have a prior right to the proceeds from the sale of a secured asset. The court held that the dues of a secured creditor, subject to CERSAI registration, would rank superior to the dues of the relevant department of the State Government. The court emphasized that the term "priority" as used in Section 26E of the SARFAESI Act and Section 31B of the RDDB Act means that the secured creditors' claims take precedence over other debts, including government dues.

Applicability and Effect of Section 26E of the SARFAESI Act and Section 31B of the RDDB Act
The court examined the impact of Sections 26E and 31B, which were introduced by the 2016 Amending Act. It was noted that these sections accord priority to secured creditors over government dues. The court clarified that Section 31B of the RDDB Act would apply only in cases where proceedings have been initiated under the RDDB Act and a determination has been made by the DRT. It cannot be invoked to overcome the disability posed by Section 26E of the SARFAESI Act.

Retrospective or Prospective Application of Section 26E of the SARFAESI Act
The court held that the provisions of Chapter IV-A of the SARFAESI Act, including Section 26E, are prospective in application from the date they were brought into force, i.e., January 24, 2020. The court reasoned that the amendments introduced substantive changes in the law and cannot be given retrospective effect.

Registration Requirements for Secured Creditors to Claim Priority
The court emphasized that for a secured creditor to claim priority under Section 26E of the SARFAESI Act, the security interest must be registered with the CERSAI. Without such registration, the secured creditor cannot enforce its security interest or claim priority in payment.

Impact of Attachment Orders by Government Departments on Secured Creditors' Claims
The court held that if the immovable property of the defaulter is shown to have been attached in accordance with law prior to the enforcement of Chapter IV-A of the SARFAESI Act or Section 31B of the RDDB Act, and such attachment is followed by a proclamation according to law, the priority accorded by Section 26E and Section 31B would not apply. However, mere creation of charge or entry in the record of rights without proper attachment and proclamation would not affect the secured creditors' priority.

Auction Purchasers' Liability for Government Dues
The court clarified that if the sale of a secured asset is expressly made on "as is where is, whatever there is basis," the auction purchaser would be liable to deposit money for the discharge of encumbrances unless they can disprove the claim of the department that they had no constructive notice of the charge. The court also noted that if the department fails to register its claim with the CERSAI, it would suffer the consequences.

Separate Judgments:
The court delivered separate judgments for each writ petition based on the specific facts and circumstances, applying the principles laid down in the judgment. The court allowed some petitions, quashed attachment orders, and directed the registration of sale certificates, while in others, it dismissed the petitions due to non-compliance with registration requirements or other procedural lapses.

Conclusion:
The judgment provides a comprehensive analysis of the priority of claims between secured creditors and government departments, emphasizing the importance of CERSAI registration for secured creditors to claim priority under the SARFAESI Act. The court's decision ensures clarity and consistency in the enforcement of security interests and the resolution of competing claims.