2016 (12) TMI 373 - HC - VAT and Sales Tax

Priority of Charge - mortgage of property - whether the Financial Institution, which is a secured creditor, or the department of the government concerned, would have the Priority of Charge over the mortgaged property in question, with regard to the tax and other dues? - Held that - Considering the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Section 41 of the same seeking to introduce Section 31B in the Principal Act, there is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with notwithstanding clause and has come into force from 01.09.2016. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending.The aforesaid would, thus, answer question (a) in favour of the financial institution, which is a secured creditor having the benefit of the mortgaged property. Status and the rights of a third party purchaser of the mortgaged property - Held that - The same is stated to relate only to auction sales, which may be carried out in pursuance to the rights exercised by the secured creditor having a mortgage of the property. This aspect is also covered by the introduction of Section 31B, as it includes secured debts due and payable to them by sale of assets over which security interest is created .

Summary

Issues:
1. Priority of charge between a financial institution and a government department over a mortgaged property in terms of tax and other dues.
2. Status and rights of a third party purchaser of a mortgaged property.

Analysis:

Issue 1: Priority of Charge
The judgment addresses the issue of priority of charge between a financial institution, as a secured creditor, and a government department over a mortgaged property concerning tax and other dues. The court refers to the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, specifically Section 41 seeking to introduce Section 31B in the Principal Act. Section 31B establishes that secured creditors have priority in realizing secured debts over all other debts and government dues, including taxes, revenues, cesses, and rates due to governmental authorities. The court emphasizes that the rights of a secured creditor to realize debts through the sale of assets with security interest take precedence over government dues, clarifying that this provision is effective from 01.09.2016. Consequently, the judgment favors the financial institution as a secured creditor with the benefit of the mortgaged property.

Issue 2: Rights of Third Party Purchaser
Regarding the status and rights of a third party purchaser of a mortgaged property, the court explains that this issue primarily pertains to auction sales conducted following the exercise of rights by the secured creditor holding a mortgage over the property. The introduction of Section 31B also covers this aspect by including "secured debts due and payable to them by sale of assets over which security interest is created." Therefore, the judgment clarifies that the rights of a third party purchaser are subject to the provisions outlined in Section 31B, emphasizing the authority of secured creditors in such transactions.

In conclusion, the judgment provides a comprehensive analysis of the issues concerning the priority of charge between a financial institution and a government department over a mortgaged property, as well as the status and rights of third party purchasers in the context of auction sales involving secured debts. The court's interpretation of the relevant legal provisions ensures clarity and precedence in determining the rights of the parties involved, particularly favoring secured creditors in line with the established legislative framework.