2023 (9) TMI 310 - HC - Companies Law

Removal of attachment in respect of secured property belonging to the 2nd respondent - attachment made for recovery of public dues - sale certificate issued with encumbrances - procedures followed by the Bank under the provisions of the SARFAESI Act and Rules are proper or otherwise - whether the claim of secured creditor will prevail over Crown's debts? - HELD THAT - There is no proof on record filed by the petitioner to show that the sale certificate was properly sent by the Authorised Officer to the 3rd respondent for making entries as contemplated under Section 89(4) of the Registration Act. In the absence of any such proof, the relief as such sought for against the 3rd respondent is not entertainable and is pre-mature. The 1st respondent has further stated that the Writ of Mandamus is not maintainable since the entry in the Encumbrance certificate could be quashed but by merely seeking Writ of Mandamus, the petitioner is not entitled for the relief. The Bank has not initiated any steps to resolve the issues through AMRD as per the Government of India memorandum. It is not as if the Bank's interests alone is to be protected by the Courts. The Courts are bound to consider the plight of Crown's debt equally. In the event of any procedural violations or violations of the provisions of the SARFAESI Act or Rules, then the Court may not be in a position to grant the relief in favour of the petitioner, as such sought for in the writ petition - mandatory procedures contemplated under the Rules, if violated or not complied with, then the secured creditor/ Bank is not entitled for the relief to lift the attachment without clearing the dues or to remove the attachment from the encumbrance certificate under the provisions of the Registration Act. Whether the interest of the third party purchaser can be protected in such circumstances, when the sale certificate was issued with encumbrances? - HELD THAT - By Applying the principles of Caveat emptor, the third party purchaser, who purchased the property through public auction was made aware of the encumbrances. Once the purchaser has the knowledge about the encumbrances and purchased the property through auction, then it is his obligation to discharge the encumbrances and convert the encumbered property free from encumbrances. The Bank cannot file a writ petition so as to protect the interest of the third party, who has purchased the property knowing the fact that there are other encumbrances. Once the Bank auctioned the property and issued a sale certificate under Sub Rule (6) to Rule 9 of Security Enforcement Rule 2002 by mentioning the list of other encumbrances, then such sale certificate cannot be registered by the registering authority. In the event of non-compliance of the statutory rules issued under the SARFAESI Act, the Bank is not entitled for any relief from the hands of the Constitutional Courts. Unilateral actions of the secured creditors, at no circumstances be appreciated. They, being a public sector, is duty bound to protect the interest of the other statutory creditors as it is Crown's debt. The power conferred under the SARFAESI Act cannot be exercised, so as to deprive the other statutory creditors from realising their dues. The compliance of the procedures contemplated in the rules are not only mandatory but the non-compliance would result in denial of an opportunity to the non-secured creditors to recover their dues - in the present case, the secured creditor is not in a position to recover their dues in entirety. In such circumstances, Sub Rule (10) of Rule 9 contemplates that the certificate of sale issued under Sub Rule (6) shall specifically mention whether the auction purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not. If the auction sale is made with encumbrances, then the registering authority under the Registration Act cannot remove the same. In the present case, the petitioner / Indian Overseas Bank conducted public auction of the secured assets. They recovered their dues partly. The sale certificate was issued by the authorised officer notifying the known encumbrances. The petitioner Bank thereafter filed the present writ petition seeking a direction against the Sub-Registrar to register the sale certificate, but the sale certificate was issued by the Authorised Officer with known encumbrances. Thus, the sale certificate issued cannot be construed as free from encumbrances as contemplated under Rule 9 of the Security Interest Enforcement Rules - the sale certificate issued with encumbrances is non-registrable and the Registering Authority is not empowered to remove encumbrances at the request of the Bank. This Court has to arrive at an inevitable conclusion that the writ petition filed by the petitioner Bank and the relief as such sought for are untenable - the writ petition stands dismissed .

Summary

Issues Involved:
1. Removal of attachment on secured property.
2. Priority of secured creditor over unsecured creditor.
3. Compliance with statutory procedures under SARFAESI Act and Security Interest (Enforcement) Rules.
4. Validity of sale certificate with known encumbrances.

Summary:

Issue 1: Removal of Attachment on Secured Property
The petitioner, a Bank, sought a direction to remove the attachment effected by the 1st respondent on the secured property to enable the registration of the sale certificate in favor of auction purchasers. The attachment by the 1st respondent was preventing the Bank from auctioning the property and realizing its dues.

Issue 2: Priority of Secured Creditor Over Unsecured Creditor
The Court confirmed that the petitioner-Bank, as a secured creditor, holds the first charge over the property under Section 26-E of the SARFAESI Act and Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993. The 1st respondent, being an unsecured creditor, does not have precedence over the secured creditor.

Issue 3: Compliance with Statutory Procedures Under SARFAESI Act and Security Interest (Enforcement) Rules
The Court emphasized the importance of following the procedures under Rule 9 of the Security Interest (Enforcement) Rules, 2002. The Bank must ensure that the sale of the secured property is free from encumbrances. The Bank failed to provide proof that the sale certificate was properly sent to the 3rd respondent for making entries as required under Section 89(4) of the Registration Act.

Issue 4: Validity of Sale Certificate with Known Encumbrances
The sale certificate issued by the Bank indicated known encumbrances, including dues to the Commercial Tax Department, Central Excise and Service Tax Department, and Tamil Nadu Electricity Board. The Court ruled that a sale certificate with known encumbrances cannot be registered under the Registration Act. The auction purchaser, aware of these encumbrances, must discharge them to convert the sale into one free from encumbrances.

Conclusion:
The Court dismissed the writ petition, stating that the Bank's actions were premature and non-compliant with statutory procedures. The sale certificate issued with encumbrances is non-registrable, and the attachment cannot be removed without clearing the dues. The Bank and the auction purchaser cannot deprive other statutory creditors of their rights to realize their dues.