2024 (10) TMI 229 - HC - FEMA

Priority of secured creditors under SARFAESI Act - attachment by virtue of Section 26 (E) of the SARFAESI Act - respondent No. 3 had mortgaged the subject property in favour of the petitioner in the year 2013-14 much prior to the search conducted by the respondent Nos. 1 2 under Section 132 of the Income Tax Act - HELD THAT - The claim of the petitioner as against the subject property mortgaged by respondent No. 3 in favour of the petitioner is as long back as in year 2013 would have an over riding effect in respect of all subsequent claims including the alleged claims of respondent Nos. 1 2 which was only in the year 2017 as held by the Madras High Court in the case of State Bank of India Vs. Tax Recovery Officer 2022 (12) TMI 557 - MADRAS HIGH COURT The orders of attachment passed by the Tax Recovery Officer/Income Tax Department were subsequent to the mortgage created in favour of the secured creditors and hence, the same will have no legs to stand. 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 Also, in SBICAP s case 2023 (3) TMI 1509 - BOMBAY HIGH COURT Division Bench of the 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. Thus by virtue of the provisions contained in Section 26E of the SARFAESI Act, coupled with the undisputed fact that mortgage of the subject property by the respondent No. 3 in favour of the petitioner in 2013 was earlier/prior in point of time to the search conducted by respondents No. 1 2 in the year 2017, I am of the considered opinion that the mortgage in favour of the petitioner over ride and prevail over the proceedings initiated by respondents No. 1 2 and consequently, the impugned order of attachment deserves to be quashed.

Summary

Issues Involved:
1. Priority of secured creditors under Section 26E of the SARFAESI Act.
2. Conflict between SARFAESI Act and other statutory claims or attachments.
3. Applicability of Section 31B of the Recovery of Debts and Bankruptcy Act.
4. Jurisdiction and authority of orders under conflicting statutes.

Issue-wise Detailed Analysis:

1. Priority of Secured Creditors under Section 26E of the SARFAESI Act:
The petitioner argued that their rights as a secured creditor, established by the mortgage created in 2013, take precedence over subsequent claims, including those by respondents under other statutory provisions. Section 26E of the SARFAESI Act provides that debts due to secured creditors shall be paid in priority over all other debts and government dues. The court noted that this provision has an overriding effect, ensuring that the rights of secured creditors are prioritized over other claims, including taxes and government dues.

2. Conflict between SARFAESI Act and Other Statutory Claims or Attachments:
The petitioner contended that the attachment order by respondent No. 2 was subordinate to the mortgage in favor of the petitioner due to the overriding provisions of the SARFAESI Act. The court examined precedents where the SARFAESI Act was held to prevail over other statutory claims, including those under the Income Tax Act and Central Excise Act. It was emphasized that when two statutes conflict, the one with the "superior purpose," such as the SARFAESI Act, which facilitates recovery of secured debts, prevails.

3. Applicability of Section 31B of the Recovery of Debts and Bankruptcy Act:
The court referenced Section 31B of the Recovery of Debts and Bankruptcy Act, which similarly prioritizes the rights of secured creditors over government dues. This section was cited to support the argument that secured creditors' claims take precedence, reinforcing the position established under the SARFAESI Act. The court highlighted that both Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act provide a statutory framework that ensures secured creditors' claims are prioritized.

4. Jurisdiction and Authority of Orders under Conflicting Statutes:
The court considered whether the order of attachment by respondent No. 2 was valid, given the pre-existing mortgage in favor of the petitioner. It was determined that the attachment order lacked jurisdiction and authority due to the overriding provisions of the SARFAESI Act. The court emphasized that the SARFAESI Act, being a later enactment with specific provisions for secured creditors, prevails over earlier statutes like the Income Tax Act and FEMA. Consequently, the court quashed the attachment order, affirming the priority of the petitioner's mortgage.

Conclusion:
The court concluded that the petitioner's rights as a secured creditor under the SARFAESI Act have priority over the attachment order by respondent No. 2. The impugned order was quashed, and the court directed the release of the mortgaged property to the petitioner, reaffirming the precedence of secured creditors' claims under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act.