Only expressly created statutory first charges under Central and State laws can take precedence over claims of secured creditors

In Central Bank Of India vs State Of Kerala & Ors on 27 February, 2009, the issue before the Supreme Court was Whether Section 38C of the Bombay Sales Tax Act, 1959 [for short "the Bombay Act"] and Section 26B of the Kerala General Sales Tax Act, 1963 [for short "the Kerala Act"] and similar provision contained in other State legislations by which first charge has been created on the property of the dealer or such other person, who is liable to pay sales tax etc., are inconsistent with the provisions contained in the DRT for recovery of `debt' and the the Securitisation Act for enforcement of `security interest' and whether by virtue of non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act, two Central legislations will have primacy over State legislations are the questions which arise for determination in these appeals.

Through a detailed judgment, the Supreme Court held that the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or Securitisation Act, the provisions contained in those Acts cannot override other legislations.

That at the stage of adjudication under Section 17 and execution of the certificate under Section 25 etc. the provisions of the RDB Act, 1993 confer exclusive jurisdiction on the Tribunal and the Recovery Officer in respect of debts payable to banks and financial institutions and there can be no interference by the Company Court under Section 442 read with Section 537 or under Section 446 of the Companies Act, 1956. In respect of the monies realised under the RDB Act, the question of priorities among the banks and financial institutions and other creditors can be decided only by the Tribunal under the RDB Act and in accordance with Section 19(19) read with Section 529-A of the Companies Act and in no other manner. The provisions of the RDB Act, 1993 are to the above extent inconsistent with the provisions of the Companies Act, 1956 and the latter Act has to yield to the provisions of the former. This position holds good during the pendency of the winding-up petition against the debtor Company and also after a winding-up order is passed. No leave of the Company Court is necessary for initiating or continuing the proceedings under the RDB Act, 1993. Points 2 and 3 are decided accordingly in favour of the appellant and against the respondents.

That the DRT Act and Securitisation Act do not create first charge in favour of banks, financial institutions and other secured creditors and the provisions contained in Section 38C of the Bombay Act and Section 26B of the Kerala Act are not inconsistent with the provisions of the DRT Act and Securitisation Act so as to attract non obstante clauses contained in Section 34(1) of the DRT Act or Section 35 of the Securitisation Act.

As for the argument made on behalf of the bank that its dues will have priority because at the time when the statutory first charge came into existence, there was already a mortgage in respect of the same property, the Supreme Court decided that where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, 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. The interest of the mortgagee is not excluded from the first charge.

The State laws creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. The charge operates on the entire property of the dealer including the interest of the mortgagee therein. Looked at a little differently, the statute has created a first charge on the property of the dealer. What is meant by a "first charge"? Does it have precedence over earlier mortgage? Now, as set out in Dattatreya Shanker Mote v. Anand Chintaman Datar [(1974) 2 SCC 799, a charge is a wider term than a mortgage. It would cover within its ambit a mortgage also. Therefore, when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage.