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2024 (7) TMI 1461 - HC - FEMAPriority of debts due to any secured creditor - priority of SARFAESI Act versus FEMA - HELD THAT - Debts due to any secured creditor shall be paid in priority over all other debts, dues and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or other local authority; it follows therefrom that the provisions of the SARFAESI Act would prevail over the provisions of other earlier enactments, under which, amounts are allegedly due to the Central Government; it is well settled that if there are two special Acts / enactments, it is the later enactment that shall prevail; in the instant case, it cannot be gainsaid that the FEMA (a special law / Act) is an earlier enactment, while the SARFAESI Act (a special law / Act) is a later / subsequent enactment which would prevail over FEMA in the light of the principles laid down by the Apex Court in several judgments including Solidaire India s case 2001 (2) TMI 968 - SUPREME COURT So also, in SBICAP s case 2023 (3) TMI 1509 - BOMBAY HIGH COURT held that the provisions of the Prevention of Money Laundering Act, 2002 (for short the PMLA ) would be subservient to the rights of a secured creditor under the SARFAESI Act which would prevail and override the provisions of the PMLA. In the instant case, in the light of the undisputed fact that the SARFAESI Act, 2002 is a later Act / law, the same would prevail over the earlier Act / law, i.e., FEMA, 1999 and having regard to the language employed in Section 26E of the SARFAESI Act, the provisions contained therein would have a overriding effect over the provisions of the FEMA and the SARFAESI Act would prevail over FEMA; as a natural corollary, the dues payable in favour of the petitioner Bank which is a secured creditor would prevail over the dues allegedly payable to the respondents 1 and 2 by the 3rd respondent under FEMA and consequently, the impugned order purporting to seize / attach the schedule property for alleged dues under FEMA are clearly without jurisdiction or authority of law, inasmuch as since the schedule property had already been mortgaged in favour of the petitioner Bank by the 3rd respondent, prior to the impugned order, the 2nd respondent was neither entitled to nor empowered to pass the impugned order of seizure / attachment of the property which had already stood mortgaged in favour of the petitioner prior to the impugned order. Section 37A, under which the impugned order has been passed by the 2nd respondent being prospective in nature and operation, the said provision could not have been invoked by the 2nd respondent for the purpose of passing the impugned order of seizure / attachment in relation to the schedule property which had undisputedly stood mortgaged in favour of the petitioner Bank prior to Section 37A coming into force and consequently, the said provision was not applicable to the schedule property and the 2nd respondent did not have jurisdiction or authority of law to invoke or apply Section 37A of the FEMA for the purpose of passing the impugned order which deserves to be quashed on this ground also. Priority of secured creditors under Section 31B of the RDBI Act - A perusal of Section 31B of the RDBI Act and the principles laid down by the Full Bench of the Madras High Court supra, is sufficient to come to the conclusion that in the proceedings sought to be initiated by the petitioner Bank under SARFAESI Act, which would be governed by the procedure prescribed under the RDBI Act, the petitioner Bank being a secured creditor would have priority and the claim of the petitioner would prevail over the alleged dues payable under the FEMA as directed in the impugned order in the light of the overriding effect of the RDBI Act over the FEMA and consequently, viewed from this angle also, it is of the view that the impugned order deserves to be quashed. Insofar as the contention urged by the respondents that the dues payable to them under FEMA are not specifically covered by either Section 26E of the SARFAESI Act or by Section 31B of the RDBI Act is concerned, in the light of the express language employed in both the provisions which contemplate debts, government dues, revenues, taxes, cesses and rates due to the Central Government etc., the alleged dues under FEMA being payable to the respondents 1 and 2 who represent the Central Government, the same are covered by the aforesaid provisions and as such, the said contention urged by the respondents 1 and 2 cannot be accepted. Insofar as the contention as regards availability of equally efficacious and alternative remedy by way of an appeal under Section 37A (5) of the FEMA is concerned, in the light of the findings recorded by me hereinbefore that the impugned order is without jurisdiction or authority of law and the same is not only illegal and arbitrary but also contrary to the provisions contained in the SARFAESI Act and RDBI Act and consequently, mere availability of a remedy by way of an appeal cannot be construed or treated as denuding this Court of its jurisdiction under Article 226 of the Constitution of India and the said contention of the respondents 1 and 2 in this regard cannot be accepted. Petition is hereby allowed. The impugned order at Annexure-A dated 31.03.2022 passed by the 2nd respondent insofar as it relates to the schedule property mortgaged by the 3rd respondent in favour of petitioner Bank is hereby quashed.The 2nd respondent is hereby directed to release the schedule property mortgaged to the petitioner
Issues Involved:
1. Priority of secured creditor's debt under Section 26E of the SARFAESI Act over other dues, including those under FEMA. 2. Applicability of Section 37A of FEMA to properties mortgaged before its enactment. 3. Priority of secured creditors under Section 31B of the RDBI Act. 4. Jurisdiction and legality of the impugned order passed under Section 37A of FEMA. 5. Availability of an alternative remedy under Section 37A(5) of FEMA. Issue-wise Detailed Analysis: 1. Priority of Secured Creditor's Debt under Section 26E of SARFAESI Act: The petitioner argued that under Section 26E of the SARFAESI Act, debts due to secured creditors have priority over all other debts, including government dues. The court agreed, emphasizing that the SARFAESI Act, being a later enactment, prevails over FEMA. The court cited the case of Solidaire India Ltd. vs. Fairgrowth Financial Services and others, which established that the later special law prevails over the earlier one. Therefore, the SARFAESI Act overrides FEMA, and the petitioner's secured debt takes precedence. 2. Applicability of Section 37A of FEMA to Properties Mortgaged Before Its Enactment: The court examined whether Section 37A of FEMA, which came into force on 09.09.2015, could apply to properties mortgaged before this date. The court concluded that Section 37A is substantive and cannot be applied retrospectively. Since the mortgage in favor of the petitioner was created on 20.02.2015, before Section 37A came into effect, the provision could not be invoked for the impugned order. Thus, the seizure order was deemed inapplicable and without jurisdiction. 3. Priority of Secured Creditors under Section 31B of RDBI Act: The court referred to Section 31B of the RDBI Act, which grants secured creditors priority over all other debts, including government dues. The court cited the Full Bench decision of the Madras High Court in Assistant Commissioner vs. Indian Overseas Bank, affirming that secured creditors' rights to realize secured debts have priority over government dues. Consequently, the petitioner's claim under the SARFAESI Act prevails over the dues under FEMA. 4. Jurisdiction and Legality of the Impugned Order Passed under Section 37A of FEMA: The court found the impugned order dated 31.03.2022, passed under Section 37A(1) of FEMA, to be illegal and without jurisdiction. The court emphasized that the schedule property was already mortgaged to the petitioner before the enactment of Section 37A. Therefore, the respondent had no authority to seize the property under FEMA, making the impugned order arbitrary and unlawful. 5. Availability of an Alternative Remedy under Section 37A(5) of FEMA: The respondents argued that the petitioner had an alternative remedy by appealing under Section 37A(5) of FEMA. However, the court held that since the impugned order was without jurisdiction, the availability of an appeal did not preclude the court from exercising its jurisdiction under Article 226 of the Constitution. The court rejected the contention that the petitioner should be denied relief due to the existence of an alternative remedy. Conclusion: The court allowed the petition, quashing the impugned order dated 31.03.2022. The court directed the respondent to release the mortgaged property to the petitioner within four weeks, reinforcing the priority of secured creditors under the SARFAESI Act and RDBI Act over dues under FEMA.
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