2008 (2) TMI 98 - HC - Central Excise

Default in payment of loan & excise duty attachment order by dept. as well as bank for recovery of arrears Auction Sale Notice issued by bank for sale of properties impugned petition seeking to quash the said recovery proceedings question of law as to the priority of debts as between the petitioner & the Banks there is no specific provision either under the CEA or the Customs Act to enable the Excise Dept. to claim a precedence over the claim of secured creditor petition dismissed

Summary

Issues Involved:
1. Priority of debt recovery between the Central Excise and Customs Department and the respondent banks.
2. Applicability of the Central Excise Act, Customs Act, and SARFAESI Act in determining the priority of debt recovery.
3. Legal provisions and precedents regarding the priority of state debts versus secured creditors.

Detailed Analysis:

1. Priority of Debt Recovery:
The petitioner, the Central Excise and Customs Department, sought to question the action of the second respondent (a cooperative bank) in bringing to sale the properties of the first respondent (an assessee company) to recover amounts due. The petitioner claimed priority in such recovery over the cooperative bank and the third respondent (State Bank of Mysore - SBM).

2. Applicability of Legal Provisions:
The petitioner argued that under Section 11 of the Central Excise Act, 1944, read with Section 142 of the Customs Act, 1962, the department had the authority to recover excise duty through attachment and sale of immovable properties. The petitioner contended that these provisions, being part of earlier legislations, should take precedence over the SARFAESI Act, 2002, and the Karnataka Co-operative Societies Act, 1959.

3. Respondent Banks' Contentions:
- SBM's Position: SBM, a nationalized bank, argued that it had taken constructive possession of the secured assets under the SARFAESI Act before the petitioner initiated its recovery actions. SBM claimed that as a secured creditor, it had a statutory first charge over the assets, which should prevail over the petitioner's claims.
- Cooperative Bank's Position: The cooperative bank also claimed a similar right of recovery under the Karnataka Co-operative Societies Act, having initiated proceedings and obtained an attachment order before the petitioner's actions.

4. Legal Precedents and Doctrine of Priority:
The court referred to the Supreme Court's judgment in Dena Bank v. Bhikhabhai Prabhudas Parekh and Company and Others, AIR 2000 SC 3654, which established that the state's preferential right to recover debts is confined to ordinary and unsecured creditors. The court emphasized that the state does not have a preferential right over secured creditors.

5. Statutory Provisions:
- Central Excise Act and Customs Act: The provisions under these acts allow for the recovery of dues through attachment and sale of properties but do not explicitly provide for a priority over secured creditors.
- SARFAESI Act: The SARFAESI Act, being a special enactment, provides a comprehensive code for the recovery of debts by secured creditors, including banks, and takes precedence over general recovery provisions under other acts.

6. Court's Conclusion:
The court concluded that there is no specific provision under the Central Excise Act or the Customs Act that enables the Central Excise Department to claim precedence over the claims of secured creditors like the respondent banks. The SARFAESI Act, under which SBM had initiated proceedings and taken possession of the secured assets, clearly provides for a statutory first charge in favor of the secured creditor.

7. Final Judgment:
The petitions were dismissed, and the interim order granted earlier was vacated. The court held that the petitioner's claim for priority in debt recovery could not be sustained against the secured creditors' rights under the SARFAESI Act and the Karnataka Co-operative Societies Act.

Summary:
The High Court of Karnataka dismissed the petitions filed by the Central Excise and Customs Department, holding that the department does not have a preferential right over secured creditors like SBM and the cooperative bank in recovering dues from the assessee company. The court emphasized that the SARFAESI Act provides a statutory first charge for secured creditors, which takes precedence over the general recovery provisions under the Central Excise Act and the Customs Act.