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TMI Blog2023 (1) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the findings rendered by the Hon ble Apex Court in CENTRAL BANK OF INDIA VERSUS STATE OF KERALA AND OTHERS [ 2009 (2) TMI 451 - SUPREME COURT] is clearly applicable to the cases on hand. HELD THAT:- Hon ble Apex Court has held in Central Bank of India that in none of the judgments pointed out by the financial institutions in the said case, held that by virtue of the provisions contained in the DRT Act or the SARFAESI Act, 2002, first charge has been created in favour of Banks, financial institutions etc., and further that in none of the judgments, either called upon nor it decided competent priorities of statutory first charge created under Central Legislations (S) on the one hand and State Legislations (S) on the other, nor it proved that statutory first charge created under a State Legislation is subservient to the dues of Banks, financial institutions etc., even though statutory first charge has not been created in their favour - It was finally held therein that the High Court was right inholding that the Tahsildar was entitled to give effect to the primacy of statutory first charge created on the property of the dealer under Section 26B of the KGST Act, 1963; and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the purchaser free from encumbrances known to the secured creditor; and how a sale certificate is to be issued free of encumbrances - there is no case for the Banks / financial institutions that the notices were given by the Bank after making due enquiries with respect to any encumbrance or that the purchasers have come forward to purchase the property after making due enquiries with respect to any encumbrance on the property. The statutory charge created as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003, prior to any mortgage made, against the dealers would remain intact, even if the property is sold by the Bank, by the rights conferred under Section 26E of the SARFAESI Act, 2002, and Section 31B of the RDB Act 1993 read with the Rules to it, till such time the encumbrances are cleared as per the provisions of the said enactments and the rules thereto - Appeal allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... roperties which are mortgaged to the financial institutions to recover the arrears of sales tax and value added tax invoking the provisions of the Kerala Revenue Recovery Act, 1968. The Banks / financial institutions are claiming that they have the right as secured creditors to proceed against the properties in question in terms of the provisions of Section 26E of the SARFAESI Act, 2002 and Section 31B of the RDB Act, 1993, and the statutory charges as per the state acts no longer survive. 4. But, at the same time, the Revenue / Finance Department of the State claims first charge over the properties under the provisions of Section 26B of the KGST Act, 1963 and Section 38 of the KVAT Act, 2003. The issue therefore, by and between the financial institutions and the State Government with respect to the rival claims, is as to who has the right to proceed against the property, and further, if the Bank has sold any property whether the first charge created under the statutes referred to above would still continue to run with the properties sold. 5. We have heard learned Special Government Pleader Sri. Mohammed Rafiq, learned Senior Government Pleader Sri. Jaffer Khan and learned Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 10. Sub-section (5) specifies that if any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner on payment of such fee as may be prescribed. 11. Section 26C deals with effect of the registration of transactions and sub-section (1) states that without prejudice to the provisions contained in any other law, for the time being in force, any registration of transactions of creation, modification or satisfaction of security interest by a secured creditor or other creditor or filing of attachment orders under Chapter IV-A shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry for creation, modification or satisfaction of such security interest or attachment order, as the case may be. 12. Sub-section (2) thereto states that where security interest of attachment order upon any property in favour of the secured creditor or any other creditor are filed for the purpose of registration under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; or (b) by inviting tenders from the public; (c) by holding public auction including through e-auction mode, or (d) by private treaty. 17. Sub-rule (6) of Rule 8 states that the authorized officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule (5). However the proviso thereto states that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding a public auction, the secured creditor shall cause a public notice in the form given in Appendix IVA to be published in two leading newspapers including one in vernacular language having wide circulation in the locality. 18. That apart, sub-rule (7) thereto clarifies that every notice of sale shall be affixed on the conspicuous part of the immovable property and the authorized officer shall upload the detailed terms and conditions of the sale, on the website of the secured creditor, which shall include (a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor; (b) the secured debt for recovery of which the property is to be sold; (c) reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notices to the persons interested in or entitled to the money deposited within and take steps to make the payment accordingly. 25. Rule 9(9) stipulates that the authorized officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7). 26. It is significant to note that Rule 9(10) explicitly states that the certificate of sale issued under sub-rule (6) shall specifically mention whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not. 27. Therefore the contention advanced by the State Government is that reading the provisions of Section 26E and Rules 8 and 9 of the act and rules 2002 in juxtaposition, it is explicit that there is a clear-cut procedure prescribed under the Rules to enforce the security interest and to remove the encumbrances in the property. Therefore, it is the contention of the State Government that without satisfying the requirements of Rules 8 and 9 of the Rules 2002, the first charge created as per the provisions of the KSGT Act, 1963 and the KVAT Act, 2003 would continue to run with the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the phraseology employed in Section 26E is only for priority of payment of the debts due. It is also the contention of the State Government that Rules 8 and 9 discussed above would give a clear picture as to the manner in which the sale notices are to be published by the Bank and the manner in which the encumbrances are to be removed. 34. It is also submitted by the State Government that as per Section 31 of the KVAT Act, 2003 dealing with payment and recovery of tax that every dealer liable to pay tax under this Act for any return period shall pay tax within such period as may be prescribed and on failure of the dealer from whom any tax or other amount is demanded to pay within fifteen days from the date of service of notice, the whole of the amount outstanding on the date of default shall become immediately due and shall be a charge on the properties on the person or persons liable to pay the tax or other amount under the Act. 35. Sub-section (4) of Section 31 further stipulates that any taxor any other amount due under the Act from a dealer or any other person may, without prejudice to any other mode of recovery, be recovered; a) as if it were an arrear of land revenue; (b) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial Assets and Enforcement of Security Interest [Act], 2002 (54 of 2002) and in exercise of the powers conferred under section 13 read with [rules 8 and 9] of the Security Interest (Enforcement) Rules, 2002 sold on behalf of the ………….. (name of the secured creditor/institution) in favour of ……………. (purchaser), the immovable property shown in the schedule below secured in favour of the ……………. (name of the secured creditor) by …………… (the names of the borrowers) towards the financial facility ……………. (description) offered by …………………… (secured creditor). The undersigned acknowledge the receipt of Rs……………….. (Rupees …………… only), the sale price in full and handed over the delivery and possession of the schedule property. The sale of the scheduled property was made free from all encumbrances known to the secured creditor listed below on deposit of the money demanded by the undersigned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 3 interpretation clause of the TP Act,1882 is relevant. Section 3 states that 'in this Act, unless there is something repugnant in the subject or context, …..a person to have notice of a fact when he actually knows that fact, or when, but for willful abstention from an enquiry or search which he ought to have made, or gross negligence, he would have known it'. 43. Therefore, the sale notice issued by the Bank as said above is to alert or caution any person purchasing the property to conduct due enquiries, and if he fails or being negligent to make any enquiry, Section 3 interpretation clause of T. P. Act 1882 discussed above makes it clear that the encumbrance is deemed to be known to the purchaser. 44. This provision of the TP Act, 1882 read with Rules 8 and 9 of the Rules 2002, makes it explicit that the notice issued by the Bank is to meet its statutory requirements contained under Section 3 of the TP Act, 1882. This is more so, since Section 3 of the TP Act, 1882 and the provisions of Rule 8 and 9 of the Rules 2002 has no contradiction at all. But on the other hand, the notice issued under Appendix IV-A of the Rules 2002 wherein the expressions like 'as is where is' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd held that the transferee is not entitled to put forward any defence that the transfer was made for valid consideration or that he is a bonafide purchaser for value and that once the ingredients of Section 26A are attracted, the transfer made by the assessee would be void. 50. Contentions are advanced by the learned Special Government Pleader on the basis of a judgment rendered by a Division Bench of the Bombay High Court in Medineutrina Pvt. Ltd. v. District Industries Centre [AIR 2021 Bom. 135] which considered the very same question vis-a-vis the Maharashtra Value Added Tax Act, 2002. After elaborate discussion of the provisions of the SARFAESI Act, 2002, the Maharashtra Value Added Tax Act, 2002, the Transfer of Property Act, 1882, and other laws, the Division Bench of the Bombay High Court has arrived at the following conclusions:- "41. The secured creditor under the SARFAESI Act, therefore must in all cases ensure: (a) that the property offered as a security interest is free from any encumbrance whatsoever, at the time when it is so offered initially, to avail financial credit by the owner/s: (b) in all such cases, a title verification certificate, by a lawyer, at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meant for the benefit and Interest of the citizens and is not expected to play hide and seek, in its dealings, but has to act fairly and is under an obligation in law, to make a full and candid disclosure as to the dues and encumbrances in respect of the property put to auction and the status as to possession of the property, for which it has to make reasonable enquiries, which should be demonstrable from the record. The secured creditor cannot be heard to say that It was for the bidder to obtain such information, for the reason, that being a lender, it is already holding the documents of the borrower, which confer upon it a right to obtain such Information. 42. What we have stated above, is nothing new, but the statutory obligation of the secured creditor, as the owner of the property under Section 13(6) and (7) of the SARFAESI Act, read with Rules 8 (7) (a) and (f), Rules 9 (7) (9) and (10) of the SI (E) Rules, 2002 with a liability to transfer a clear and marketable title, as the seller. 43. Mr. Dawda, learned Counsel for the petitioner, further invites our attention to the judgment of the Hon'ble Apex Court in the case of The Maharashtra State Co- operative Bank ltd. / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dismissed. In order to have a proper appreciation of the order passed in the Special Leave Petition and ascertain its implication as a binding precedent, it is better that the said order is extracted:- "Much ado was made by the learned counsel for the petitioner on the basis of observations made by the High Court in paragraphs 26 and 27 of the impugned judgment. Those observations, in our opinion, are not a positive finding of fact in favour of the petitioner that the petitioner had no constructive notice as such. It is not necessary for us to examine the other aspects dealt with by the High Court in the impugned judgment. For, the agreement executed by the petitioner pursuant to which the auction was concluded in favour of the petitioner reads thus:- "16. All statutory dues/attendant charges/other dues, including registration charges, stamp duty, taxes, any other known, Unknown liability, expenses, property tax, any other dues of the Govt. or anybody in respect of properties/assets sold, shall have to be borne by the purchaser. 17. The sale certificate shall be issued in the same name in which the Bid is submitted. 18. Any other encumbrances known to the Bank is not kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vaswom Board v. Local Fund Audit [2020 (3) KLT 296], wherein taking into account Sections 26E of the SARFAESI Act, 2002 and 31B of the RDB Act, 1993 it was held that the provisions of Section 38 of KVAT Act, 2003 cannot have overriding effect on the provisions of the SARFAESI Act, 2002 and the RDB Act, 1993 by virtue of Articles 246 and 254(1) of the Constitution of India. However, it is submitted that RP No. 432 of 2020 seeking to review the said judgment is filed by the State, which is admitted and pending consideration before this court. 55. Learned Special Government Pleader has invited our attention to the judgment of a Three Judge Bench of the Hon'ble Apex Court in State Bank of Bikaner and Jaipur v. National Iron & Steel Rolling Corporation and Others [(1995) 2 SCC 19] wherein it was held that when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer and the interest of the mortgagee is not excluded from the first charge and therefore the charge so created as per the provisions of the Rajasthan Sales Tax Act, 1994 will operate on the property as a whole and not on the equity of red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is important to note that the Hon'ble Apex Court has held in Central Bank of India (supra) that in none of the judgments pointed out by the financial institutions in the said case, held that by virtue of the provisions contained in the DRT Act or the SARFAESI Act, 2002, first charge has been created in favour of Banks, financial institutions etc., and further that in none of the judgments, either called upon nor it decided competent priorities of statutory first charge created under Central Legislations (S) on the one hand and State Legislations (S) on the other, nor it proved that statutory first charge created under a State Legislation is subservient to the dues of Banks, financial institutions etc., even though statutory first charge has not been created in their favour. 62. It was finally held therein that the High Court was right inholding that the Tahsildar was entitled to give effect to the primacy of statutory first charge created on the property of the dealer under Section 26B of the KGST Act, 1963; and therefore held that the State has got prior charge over the property of the dealer and there is no valid ground to interfere with the order passed by the Division Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f workman in respect of their dues over such proceeds. 66. The said judgments considered elaborately the intricacies of conflict by and between a Central Law and a State Law and basically held that if there is a direct conflict by and between a Central Law and a State Law vis-a-vis the Entries contained under List I and List III, the Central Law would prevail. 67. In view of the contention advanced by the learned counsel for the Bank / Financial institutions, Sri. S. Easwaran and Sri. Mohan Jacob George that the dismissal of the SLP in Medineutrina (supra) is not a precedent binding this Court under Article 141 of the Constitution of India, learned Special Government Pleader has invited our attention to the judgment of a Three Judge Bench of the Hon'ble Apex Court in Khoday Distilleries Limited v. Sri. Mahadeshwara Sahakara Sakkare Karkhane Limited [(2019) 4 SCC 376] which held as follows:- "26. From a cumulative reading of the various judgments, we sum up the legal position as under: 26.1. The conclusions rendered by the three-Judge Bench of this Court in Kunhayammed and summed up in para 44 are affirmed and reiterated. 26.2. We reiterate the conclusions relevant for these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder. Whatever be the phraseology employed in the order of dismissal, if it is a non-speaking order, i.e. it does not assign reasons for dismissing the special leave petition, it would neither attract the doctrine of merger so as to stand substituted in place of the order put in issue before it nor would it be a declaration of law by the Supreme Court under Article 141 of the Constitution for there is no law which has been declared. If the order of dismissal be supported by reasons then also the doctrine of merger would not be attracted because the jurisdiction exercised was not an appellate jurisdiction but merely a discretionary jurisdiction refusing to grant leave to appeal. We have already dealt with this aspect earlier. Still the reasons stated by the Court would attract applicability of Article 141 of the Constitution if there is a law declared by the Supreme Court which obviously would be binding on all the courts and tribunals in India and certainly the parties thereto. The statement contained in the order other than on points of law would be binding on the parties and the court or tribunal, whose order was under challenge on the principle of judicial discipline, this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recedent under Article 141 and doctrine of merger was considered by the Hon'ble Apex Court and held as follows:- "24. As pointed out by this Court in Kunhayammed v. State of Kerala [Kunhayammed v. State of Kerala, (2000) 6 SCC 359], there is a distinction between the dismissal of a special leave petition by a non-speaking order where no reasons are recorded and the dismissal of a special leave petition by a speaking or reasoned order. In both cases, the doctrine of merger would not apply. But in cases falling under the latter category, the reasons stated by the Court would attract the applicability of Article 141 of the Constitution, if a point of law has been declared therein. If what is stated in the order of the Supreme Court (before the grant of leave) happen to be findings recorded by the Supreme Court, not amounting to a declaration of law, the findings so recorded would bind only the parties thereto. Though the views expressed in Kunhayammed [Kunhayammed v. State of Kerala, (2000) 6 SCC 359] were thought of to be in conflict with the views expressed in certain other decisions [Abbai Maligai Partnership Firm v. K. Santhakumaran (Abbai Maligai Partnership Firm v. K. Santhaku ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties mortgaged as per the provisions of the SARFAESI Act, 2002. 75. In order to advance contentions in that regard learned counsel for the Bank / financial institutions have invited our attention to the judgments of the Hon'ble Apex Court in Employees Provident Fund Commissioner v. Official liquidator [(2011) 10 SCC 727] and Jitendra Nath Singh v. Official Liquidator and Others [(2013) 1 SCC 462]. Learned counsel has also invited our attention to the judgment of the High Court of Gujarat in Bank of India v. State of Gujarat and others [Manu/GJ/0130/2020] which considered the question with respect to recovery proceedings initiated by the State vis-a-vis the steps taken for sale as per the provisions of the SARFAESI Act, 2002 and the RDB Act, 1993. 76. Apparently, therein the question with respect to the application of the provisions of the State enactments creating first charge over the properties and the amended provisions contained under Chapter IV A of the SARFAESI Act, 2002 was considered, and according to the learned counsel, ultimately after discussion, it was held that the rights of a secured creditor to realize its secured debts due and payable by sale of assets over which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion26E of the SARFAESI Act could be claimed by a secured creditor without registration of the security interest with the Central Registry? Depending on the answer to this question, whether correct proposition of law has been laid down (extracted infra) in paragraph 21 of the Division Bench decision reported in 2020 (2) Bom. C. R. 243 (OS) [ASREC (India) Limited vs. State of Maharashtra and Ors.] and in paragraph 35 of the Division Bench decision, reported in 2021 (2) Mh. LJ 721 (State Bank of India vs. the State of Maharashtra and Ors.)? f. When, and if at all, can it be said that the statutory first charge under the State legislation, viz. the BST Act, the MVAT Act and the MGST Act, as the case may be, stands displaced having regard to introduction of Chapter IV-A in the SARFAESI Act from 24th January 2020? and g. Whether an auction purchaser of a secured asset would be liable to pay the dues of the department in order to obtain a clear and marketable title to the property having purchased the same on "as is where is and whatever there is basis"? 79. Therefore on a reading of the questions framed, it is clear that the Full Bench considered the question whether the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atute receive more favorable treatment than other unsecured claims. In a Bankruptcy Code Chapter 7 distribution, priority claims must be paid first. In a Chapter 11 plan, priority claims must be paid in full." 83. In Telangana State Southern Power Distribution Company Limited and Another v. Srigdhaa Beverages [(2020) 6 SCC 404], the Hon'ble Apex Court had occasion to consider the effect of 'as is where is, what is there is and without recourse basis', taking into account the contents of the sale notice therein and held as follows:- "4. The aforesaid auction notice shows that the unit was being sold on "as is where is, what is there is and without any recourse basis", as per Rules 8 & 9 of the Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as the 'said Rules'). The aforesaid clauses of the e-auction sale notice show that the total outstanding dues were much larger, but the reserve price fixed was lower, and the actual sale consideration of the successful auctioneer was Rs.9,18,65,000, which is approximately Rs.10 lakh more than the minimum reserve price. Clause 24 reproduced aforesaid makes it clear that when the reference is to a sale on "as is where is, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the amounts due under the mortgage. 87. It is quite clear and evident from Section 26E of the SARFAESI Act 2002 that it creates only a priority in favour of the financial institutions in the matter of payment over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or the State Government or local authority. But the priority in payment is in no manner in conflict with the first charge created over the properties as per the provisions of the KGST Act, 1963, and the KVAT Act, 2003. 88. It is important to note that Chapter IV-A was incorporated into the SARFAESI Act, 2002 by amending the said Act on and with effect from 01.09.2016 and if the Parliament intended that the Bank / financial institutions should be given the first charge over any first charge created by the State enactments, it could have stated so in the amended provisions. Still, it has only been chosen that the Bank or financial institutions have priority in the matter of payment of debts over other debts. The said aspect has no manner of repugnancy vis-avis the provisions of the State enactments. Which thus means, even if the Bank sells the properties and adjusts the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever be said to be a charge created over the property against the statutory charge contained under the KGST Act, 1963 and the KVAT Act, 2003 or any Central enactment. 94. In our view, this would be more clear from the explanation contained under Section 26E which states that 'for the purpose of the said Section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. The above is a clear indication that it cannot be said that merely because a priority in payment is available to the financial institutions, the statutory charge created under various enactments vanishes. 95. Considering the entire gamut of the issue and the deliberations made above, we are of the considered opinion that interference is required to the common judgment of the learned Single Judge. 96. Accordingly, the writ appeals are allowed. Therefore we hold that the statutory charge created as per the provisions of the KGST Act, 1963 and the KVAT Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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