2024 (8) TMI 1271 - HC - VAT and Sales Tax

Recovery of dues - priority of the secured creditor or the Sales Tax Department for recovering its dues from the borrower / entity - HELD THAT - While the secured creditor seeks to rely upon the Deed of Equitable Mortgage dated 7th March 2007 as well as the orders passed in Company Petition No.119 of 2013 that was filed against the borrower, the Sales Tax Department seeks to rely upon the communication dated 7th September 2013 that was issued by it to the Talathi not to record any sale transaction in the Revenue Records on account of steps being taken by it for recovering its dues. This very issue based on the provisions of Section 26E of the SARFAESI Act as well as Section 38 of the Act of 2002 was the subject matter of consideration before the Full Bench of this Court in Jalgaon Janta Sahakari Bank Ltd. and Anr. 2022 (9) TMI 163 - BOMBAY HIGH COURT . After considering the provisions of the Code as well as the Rules of 1967 along with other relevant provisions, it was held that ' if the immovable property of the defaulter is shown to have been attached in accordance with law prior to Chapter IV-A 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.' In the light of the aforesaid law it would be necessary to consider as to whether the Sales Tax Department has undertaken the attachment of the secured assets in the manner prescribed by the Code and the Rules of 1967. In the affidavit-in-reply filed on behalf of the Sales Tax Department it has stated that notices under Section 38 of the Act of 2002 came to be issued on 22nd July 2013 - Since the steps for attachment were taken prior to the provisions of Section 26E being brought on the statute book, the Sales Tax Department had the necessary priority to sell the assets in question. There is no material on record to indicate that an order of attachment was duly passed under the Code and the proclamation thereof was made in accordance with the Rules of 1967 prior to 24th January 2020 when Section 26E of the Securitization Act came into force or 1st September 2016 when Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was enforced, the Sales Tax Department would not have priority over the dues of the secured creditor. In absence of any valid order of attachment as well as a proclamation in that regard, the Sales Tax Department cannot claim precedence over the dues of the secured creditors in view of Section 26E of the Securitization Act. Mere issuance of communication to the Talathi not to permit sale of a secured assets would be of no consequence as the law requires passing of a valid order of attachment and issuance of a proclamation in accordance with the Rules of 1967 to claim priority. The communication dated 7th September 2013 issued by the 2nd respondent to the Talathi, Asangaon, Taluka Shahapur, District Thane would not preclude the petitioner from taking steps to enforce its security interest. Accordingly, the petitioner would have priority over the Sales Tax Department in respect of the secured assets referred to in the aforesaid communication. Petition disposed off.

Summary

Issues:
Priority of secured creditor vs. Sales Tax Department in recovering dues from borrower's assets.

Analysis:
The petitioner, a creditor, provided financial assistance to a borrower who later defaulted, leading to the borrower's account being declared as a Non-Performing Asset (NPA). Subsequently, the Sales Tax Department issued a communication in 2013 to prevent the sale of secured assets for recovering its dues. The petitioner filed a writ petition seeking to lift the attachment imposed by the Sales Tax Department on the properties.

The petitioner argued that it had the first charge over the secured assets and was entitled to sell them for recovering its dues. Referring to a judgment, the petitioner contended that unless the Sales Tax Department followed the prescribed procedure for attaching the assets, it had no right to prevent the sale. The petitioner had conducted an auction of the properties with the Official Liquidator's approval, depositing the sale proceeds in court, and sought permission to withdraw the amount.

On the other hand, the Sales Tax Department claimed priority in recovering dues, citing notices issued under the Maharashtra Value Added Tax Act and steps taken for recovery. It argued that its actions predated the statutory provisions that gave priority to secured creditors and thus should be allowed to sell the assets first.

The court analyzed the legal provisions and held that without a valid order of attachment and proclamation as per the rules, the Sales Tax Department could not claim priority over the secured creditor. The mere communication to prevent the sale was insufficient, and the Sales Tax Department failed to establish its precedence over the creditor. The court allowed the petitioner to withdraw the sale proceeds, confirming the petitioner's priority over the Sales Tax Department in recovering dues from the secured assets.

In conclusion, the court ruled in favor of the petitioner, granting priority to the secured creditor over the Sales Tax Department regarding the secured assets. The court allowed the petitioner to withdraw the sale proceeds and permitted further pursuit of related prayers. The writ petition was disposed of accordingly, with costs not awarded to either party.