Under SARFAESI Dues Of Secured Creditor Superior To Dues of State Govt Departments

Cause Title : Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai, & Anr., Writ Petition No. 3197 Of 2019, Bombay High Court

Date of Judgment/Order : August 30, 2022

Corum : Dipankar Datta, CJ., M. S. Karnik & N. J. Jamadar, JJ.

Citied:

1. (2002) 4 SCC 275 (Union of India vs. Delhi High Court Bar Association)
2. (2009) 4 SCC 94 (Central Bank of India vs. State of Kerala)
3. (2004) 4 SCC 311 (Mardia Chemicals Ltd. vs Union of India)
4. AIR 2007 SC 712 (Transcore vs Union of India)
5. AIR 2017 Madras 67 [Asst. Commissioner (CT) vs. Indian Overseas Bank]
6. 2020 (2) Bom. C. R. 243 (OS) [ASREC (India) Limited vs. State of Maharashtra and Ors.]
7. 2021 (2) Mh. LJ 721 (State Bank of India vs. the State of Maharashtra and Ors.)
8. 2017 SCC OnLine Raj 4319 (G. M. G. Engineers and Contractor Pvt. Ltd. and Anr. vs. State of Rajasthan and Ors.)
9. 2018 (55) GSTR 2010 (M.P.) (Bank of Baroda vs. Commissioner of Sales Tax, Madhya Pradesh, Indore)
10. (2019) SCC OnLine Ker 2890 (State Bank of India vs. State of Kerala)
11. (2019) SCC Online Guj 1892 (Kalupur Commercial Co-operative Bank Ltd. vs. State of Gujarat)
12. AIR 2021 BOMBAY 135 (Medineutrina Pvt. Ltd. (Company) vs. District Industries Centre and Ors.)
13. 2019 SCC OnLine Bom 9527 (Cosmos Co-operative Bank Ltd. vs. State of Maharashtra and Ors.)
14. (2009) 4 SCC 486 (A. I. Champdany Industries vs. Official Liquidator and Anr.)
15. (1969) 1 SCC 609 (Sukhram Singh vs. Harbheji)
16. (2011) 2 SCC 721 (Executive Engineer Dhenkanal vs. N.C. Budharaj)
17. (1987) 1 SCC 424 (Reserve Bank of India vs. Peerless General Finance and Investment Co. Ltd.)
18. AIR 1984 SC 1022 (Union of India vs. G.M. Kokil)
19. AIR 1987 SC 117 (Chandavarkar Sita Ratna Rao vs. Ashalata S. Guram)
20. (2005) 9 SCC 129 (State of Bihar & Ors. vs. Bihar Rajya M. S. E. S. K. K. Mahasangh)
21. (2008) 6 Mah LJ 941 (FB) (Mohd. Riyazur Rehman Siddiqui vs Deputy Director of Health Services)
22. (2014) 2 SCC 401 (J. Jayalalithaa v. State of Karnataka)
23. 2004 SCC OnLine Bom 1247 (Satish Arjun Surve vs. State of Maharashtra)

Background

In this major decision, the following substantial questions of law came up for answers:

a.Having regard to the statutory provisions under consideration, does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government [under the BST Act/MVAT Act/MGST Act] to appropriate the amount realized by the sale of a secured asset?

b. Whether, despite section 26E in the SARFAESI Act or section 31B of the RDDB Act being attracted in a given case, dues accruing to a department of the Government ought to be repaid first by reason of ‘first charge’ created over any property by operation of law (viz. the legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor?

c. Are the provisions, inter alia, according ‘priority’ in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act prospective?

d. Whether section 31B of the RDDB Act can be pressed into service for overcoming the disability that visits a secured creditor in enforcing its security interest under the SARFAESI Act upon such creditor’s failure to register the security interest in terms of the amendments introduced in the SARFAESI Act?

e. Whether the priority of interest contemplated by section 26E 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”?

Judgment

To the questions a & b, the High Court observed that the SARFEASI and the RDDB acts are central acts and were introduced subsequent to the other Central or State acts which empower creditors having first charge over assets, with various rights. These rights were known to the Parliamentary bodies at the time the issue of 'priority' was provided to secured creditors under the SARFEASI and the RDDB Acts. Therefore, the Parliament must have introduced the amendments in the SARFAESI Act, more particularly by incorporating section 26E therein, to explicitly make the valuable right of the ‘first charge’ holder subordinate to the dues of a second creditor. Seen from a different angle, the RDDB Act and the SARFAESI Act are Central Acts. If any provision therein is discerned to be seemingly inconsistent with any provision in a State legislation, reconciliation of the same ought to be attempted failing which the Central Acts will prevail over the State legislations, in view of the principle of repugnancy that Article 254 of the Constitution contemplates. Also, section 26E of the SARFAESI is a subsequent legislation, as it was notified on 24th January 2020. Subject to compliance of the terms of Chapter IV-A, section 26E of the SARFAESI Act would, thus, override any provision in the MGST Act and the BST Act in case of a conflict with the SARFAESI Act. Agreeing with the judgment of Kerala High Court in State Bank of India vs. State of Kerala (supra), the court held that contention of learned counsel for the State/respondents that ‘enforcement of first charge’ and ‘shall be paid in priority over all other debts’ are not synonymous and that the latter is subordinate to the former, is misconceived. If enforced, ‘first charge’ would ultimately lead to priority in payment only. Where the end result is the same, mere change in expression would not make the provisions different.

To the question c, the High Court observed that a reading of the Statement of Objects and Reasons as contained in the Bill for the 2016 Amending Act would show that the amendment was proposed to bring about a substantive change in the law and these changes were introduced for the first time “to suit changing credit landscape and augment ease of doing business”. These substantial changes, remedial in nature, having been brought in force for the first time amount to substantive law and cannot, therefore, be given retrospective effect. Further, Section 1(2) of the 2016 Amending Act states that the same shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. if the Parliament had intended that the provisions of Chapter IV-A were to be made applicable from a previous date, the notification would have said so. Therefore, on the face of it, the 2016 Amending Act has not been made applicable retrospectively but has taken effect from the date notified by the Central Government.

To the question d, the High Court observed that a statute has to be construed after ascertaining the legislative intent and in the context and scheme of the enactment. Referring to several decisions of various courts, the High Court held that :-

(a) a secured creditor, finding that it is disabled from obtaining the benefit of ‘priority’ in terms of section 26E of the SARFAESI Act for want of CERSAI registration, cannot fall back on section 31B of the RDDB Act to claim ‘priority’;

(b) the overwhelming factor of determination of a lis by the DRT has to be given its due worth and hence, the benefit of ‘priority’ that section 31B envisages is for a secured creditor who institutes proceedings under the RDDB Act and is successful in having an interim or final determination in its favour that a sum is due and payable (in section 31B) as distinguished from the debts due (in section 26E).

(c) section 31B of the RDDB Act being a substantive provision, it cannot be invoked by a secured creditor faced with the disability posed by section 26E of the SARFAESI Act; and

(d) without recourse having been taken to the procedure envisaged in the RDDB Act for recovery of its dues and without there being a determination of its claim by the DRT to the effect that any sum due from the borrower is payable to it, a secured creditor is not entitled to invoke the provisions of section 31B.

To the question e, the High Court observed that, the entire scheme of Chapter IV-A of the SARFAESI Act, as introduced by the Amending Act of 2016, leaves no manner of doubt that the object for its introduction is salutary. As per Section 26D of the SARFAESI Act, not only therefore registration with the CERSAI has been made a mandatory pre-condition for invocation of the provisions contained in Chapter III of the SARFAESI Act, the provisions relating to debts that are due to any secured creditor being payable to such creditor in priority over all other debts and revenue, taxes etc. is available to be invoked only after the registration of security interest. This being the text of section 26E, which is to be read in the context in which it is set, leads to the irresistible and inevitable conclusion that unless the security interest is registered, neither can the borrower seek enforcement invoking the provisions of Chapter III of the SARFAESI Act nor does the question of priority in payment would arise without such registration.

To the question f, the High Court observed 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.

To the question g, the High Court observed that, a conjoint reading of the aforesaid rules admits of no doubt that the authorized officer while putting up an immovable property, i.e., the secured asset, for sale, is under a duty to notify, inter alia, the details of the encumbrances (in respect of such property that is proposed to be sold) which are known to the secured creditor as well as to require the purchaser to deposit money to discharge the encumbrances. The Supreme Court in its decision in AI Champdany Industries Ltd. (supra) after considering the definition of ‘encumbrance’ in several law dictionaries, held that an ‘encumbrance’ “must be capable of being found out either on inspection of the land or the office of the Registrar or a statutory authority. A charge, burden or any other thing which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust or a lien or an easement. Encumbrance, thus must be a charge on the property. If by reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance”. With the insertion of section 26B in the SARFAESI Act read with the 2011 Rules, a secured creditor is expected to know some of such encumbrances if at all compliance of section 26B is resorted to by the Central Government, any State Government or a local authority, to whom money is owed by the defaulter being an owner of the property. Therefore, notwithstanding the duty of the authorized officer to indicate in the sale advertisement inviting bids the encumbrance(s) attached to the immovable property, i.e., the secured asset, as known to the secured creditor, if at all any detail in regard to such encumbrance(s) is not indicated but the sale is expressly made on “as is where is, whatever there is basis”, the transferee shall be duty bound to deposit money for discharge of the encumbrance(s) provided, of course, that such liability may be overcome if he is in a position to disprove the claim of the department that he had no constructive notice of the charge, far less actual notice.