2025 (7) TMI 913 - HC - GST

Recovery of government dues - priority of dues - secured creditor claims to have a priority over the secured asset or not - Section 26E of the SARFAESI Act - HELD THAT - The secured creditor claims to have a priority over the secured asset in terms of the provisions of the Section 26E of the SARFAESI Act. It is also noticed that admittedly in this case the secured creditor did not take over possession of the subject property. Having regard thereto there are no irregularity on the part of the CGST authorities in proceeding to attach the subject property in question. Although diverse issues have been raised with regard to the compliance of statutory provision relating to attachment of the property in question however taking into consideration the fact that there are huge outstandings which are also admitted both on account of CGST as also to the secured creditor though the extent thereof is not admitted it is opined that at this stage having regard to the provision contained in Section 26E of the SARFAESI Act it would be prudent to permit the secured creditor to deal with the secured asset. The issue as to whether the secured creditor has a priority vis- -vis the statutory dues of the CGST authorities is no longer res integra. The Hon ble Supreme Court in the case of Kotak Mahindra Bank Limited 2023 (1) TMI 244 - SUPREME COURT has clarified the said position and it was held that under the provisions of the MSMED Act more particularly Sections 15 to 23 no priority is provided with respect to the dues under the MSMED Act like Section 26E of the SARFAESI Act. The right of the CGST authorities to recover its dues would however be subject to the interest of the secured creditor and the secured creditor would be required to provide for and share accounts in respect of any transactions initiated by the secured creditor in furtherance of enforcing its rights under the provisions of SARFAESI Act with the CGST authorities. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the secured creditor, registered under the SARFAESI Act, has priority over the CGST authorities in respect of the secured asset attached for recovery of government dues.

- Whether the attachment of the secured asset by the CGST authorities under Section 79(1)(d) of the CGST Act, 2017, is valid despite the secured creditor's claim under the SARFAESI Act.

- The effect and applicability of Section 26E of the SARFAESI Act, particularly its non obstante clause, on the competing claims of the secured creditor and the statutory dues recoverable by CGST authorities.

- Whether the secured creditor can invoke Section 14 of the SARFAESI Act without issuance of notice under Section 13(4) of the same Act.

- The procedural and substantive legality of possession and attachment actions taken by both the secured creditor and CGST authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Priority of Secured Creditor under SARFAESI Act vis-`a-vis CGST Authorities' Attachment

The legal framework revolves around the SARFAESI Act, 2002, specifically Section 26E, which was inserted by notification dated 26th December 2019. Section 26E provides a non obstante clause conferring priority to secured creditors over other creditors, including statutory authorities, in respect of secured assets. The CGST Act, 2017, under Section 79(1)(d), empowers CGST authorities to attach properties for recovery of government dues.

The Court referred extensively to a recent Supreme Court judgment which clarified that where two statutes contain non obstante clauses, the subsequent enactment prevails. Section 26E of the SARFAESI Act, being a later enactment with a non obstante clause, overrides conflicting provisions in other statutes, including the CGST Act, regarding priority of recovery.

The Court extracted paragraph 30 from the Supreme Court ruling, emphasizing that the priority granted under Section 26E of the SARFAESI Act prevails over recovery mechanisms under other statutes such as the MSMED Act, and by analogy, applies to CGST dues as well. The Court also noted the High Court of Gujarat's reliance on the same principle in a similar context.

Applying this legal principle, the Court recognized the secured creditor's priority over the secured asset despite the CGST authorities' attachment. However, the Court also acknowledged that the secured creditor had not yet taken possession of the asset, which complicated the situation.

Validity of CGST Authorities' Attachment

The CGST authorities contended that their attachment of the secured asset was lawful and in accordance with the CGST Act, given the outstanding government dues. The secured creditor challenged this attachment, asserting its priority under the SARFAESI Act.

The Court found no irregularity in the CGST authorities' attachment per se, especially since the secured creditor had not taken possession of the property despite issuing statutory notice under Section 13(2) of the SARFAESI Act. The Court balanced the competing interests by recognizing the legitimacy of both parties' claims.

Authority of Secured Creditor to Invoke Section 14 of SARFAESI Act Without Section 13(4) Notice

The secured creditor relied on Supreme Court precedent affirming that invocation of Section 14 of the SARFAESI Act (taking possession) can be validly done without issuance of a notice under Section 13(4), provided the statutory conditions are met. This supported the secured creditor's position that its rights under the SARFAESI Act were enforceable notwithstanding procedural nuances.

Procedural Directions and Treatment of Possession

The Court observed that since the CGST authorities had already taken possession of the secured asset, it would be futile to direct the secured creditor to approach a Magistrate under the SARFAESI Act for possession recovery. Instead, the Court directed the CGST authorities to hand over possession of the secured asset to the secured creditor within one week, subject to inventory being taken in the presence of the principal borrower or its representatives.

The secured creditor was authorized to proceed with enforcement of its security interest under the SARFAESI Act. The Court clarified that the CGST authorities' right to recover dues would be subject to the secured creditor's interest, and that the secured creditor must maintain accounts of transactions related to enforcement and share these with CGST authorities.

The Court also made clear that this order was without prejudice to other pending legal proceedings and rights of the parties, preserving the scope for further adjudication on outstanding issues.

3. SIGNIFICANT HOLDINGS

"Section 26-E of the SARFAESI Act which is inserted in 2016 is also having a non obstante clause. Even as per the submission on behalf of respondent no.1, two enactments have competing non obstante provision and nothing repugnant, then the non obstante clause of the subsequent statute would prevail over the earlier enactments. As per the settled position of law, if the legislature confers the later enactment with a non obstante clause, it means the legislature wanted the subsequent /later to prevail. Thus, a 'priority' conferred/provided under Section 26-E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act. The aforesaid is to be considered along with the fact that under the provisions of the MSMED Act, more particularly Sections 15 to 23, no 'priority' is provided with respect to the dues under the MSMED Act, like Section 26E of the SARFAESI Act."

This principle was extended by the Court to the CGST Act dues, establishing that the secured creditor's claim under SARFAESI Act Section 26E holds priority over statutory claims by CGST authorities.

The Court's final determination was that while the CGST authorities' attachment was not irregular, possession of the secured asset must be handed over to the secured creditor to enable enforcement of security interest under the SARFAESI Act.

The Court emphasized cooperation between the secured creditor and CGST authorities, requiring the secured creditor to maintain and share accounts of enforcement transactions, thereby balancing the interests of both parties.