TMI Blog2019 (7) TMI 1684X X X X Extracts X X X X X X X X Extracts X X X X ..... into insignificance because the statutory right of the Revenue is, at the best, to bring the property to sale and nothing more. Irrefragibly, when the secured creditors have a right in priority to have their debts extinguished, obviously, their right to proceed against the property would also rank high than that is claimed by the Revenue. The assertion of the Revenue that their 'Charge' will continue over the property until it is sold by them, hence, is rendered without forensic support to stand on. Whether Section 26E of the SARFAESI Act and Section 31B of the RDB Act create an overriding and first right in favour of the Banks/Financial Institutions to recover their dues, over and above the rights of the Revenue created through the KGST Act/KVAT Act? - HELD THAT:- This enquiry has been rendered relatively easy for this Court because, in CENTRAL BANK OF INDIA VERSUS STATE OF KERALA AND OTHERS [ 2009 (2) TMI 451 - SUPREME COURT ], the Hon'ble Supreme Court considered the right of the Banks/Financial Institutions as regards recovery of their dues prior to the afore two provisions being introduced in the SARFAESI Act and in the RDB Act. The conclusions of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and 34002/2018 have been filed by the auction purchasers of secured assets sold by the Banks/Financial Institutions and they seek that the sale certificates in their favour be directed to be registered by the Revenue authorities, who appear to be refusing to do so citing arrears of sales tax left due by the original owners; with consequential directions to effect the transfer of registry of the properties in their favour. 3. Finally, W.P.(C) No. 28962/2017 has been filed by the owner of a property challenging the action of the respondent-Bank against it for recovery of debts from him asserting that the Revenue has First Charge over it. 4. While the petitioner-Banks/Financial Institutions claim that they have the primary right, as secured creditors, to proceed against the properties in question under Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act ('the SARFAESI Act' for brevity) and Section 31B of the Recovery of Debts and Bankruptcy Act ('the RDB Act' for brevity), the Revenue claims 'First Charge' over them under the provisions of Section 26B of the Kerala General Sales Tax (KGST) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch person. (d) Section 38 of the KVAT Act: Tax payable to be first charge on the property.-Notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person. 7. As is conspicuous from the afore sections, the SARFAESI Act and the RDB Act indubitably declare that the debt of a secured creditor shall be paid in priority over all other debts, including 'revenues, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority' and the RDB Act, in addition, elevates this right of the Bank/financial Institution to be in priority over all others, while the KGST Act and the KVAT Act avow that the arrears of tax, penalty, interest or any other amounts under it shall be a 'First Charge' over the properties of the defaulter. 8. The Revenue thus assert that since they have the 'First Charge' over the properties in question, they are legally entitled to take its possession and sell it to recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other mechanism, be that the SARFAESI Act or the RDB Act or even by a Civil Court under the Code of Civil Procedure, will cause its 'charge' over it to subsist in spite of such sale. He, however, in the same breath, concedes that since Section 26E of the SARFAESI Act and Section 31B of the RDB Act mandate that the secured debts must be paid in priority even over the taxes of the Central Government and the State Government, the proceeds of the sale thus conducted by the Revenue will have to be first adjusted towards the secured debt and that Revenue will be entitled only to the balance, if any. 13. In effect, the learned Additional Advocate General argues for the proposition that if the 'First Charge' in favour of the Revenue is to be extinguished, even though they would not be entitled to priority in appropriation of the sale proceeds - it admittedly having to be paid against the secured debt, the properties in question will have to be sold by them and therefore, that the impugned action of the Revenue in having taken steps to sell the properties in question is irreproachable and forensically valid. 14. In support of his afore contentions, Sri. Ranjith Thampan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that, contrary to this, the sale under the RR Act extinguishes all such encumbrances as is provided under Section 60 thereof and reiterates that even if the properties are sold by the Banks/Financial Institutions under the SARFAESI Act or RDB Act, the charge of the Revenue over it continues until the sale is conducted under the RR Act. 17. The learned Additional Advocate General concluded his submissions by relying on Central Bank of India v. State of Kerala and Others ( (2009) 4 SCC 94) and Employees Provident Fund Commissioner v. Official Liquidator of Esskay Pharmaceuticals Limited (2011) 10 SCC 727) and contended that the former judgment clearly declares that the Banks/Financial Institutions cannot claim a First Charge over the properties under the SARFAESI Act or RDB Act and that the latter judgment takes it beyond doubt that even if priority for recovery is granted, it will not override the Revenue's statutory First Charge. He then added that even if the argument to the contrary is accepted, the provisions of RR Act are not ousted on account of Section 37 of the SARFAESI Act, which expressly says that application of other laws is not barred. 18. In contrario sensu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing made by the Parliament, without it having to be notified, the principle of 'primacy of laws made by the Parliament' would fully apply, going by the judgment of the Hon'ble Supreme Court in State of Kerala v. Mar Appraem Kuri Company Limited and Another (2012) 7 SCC 106). 20. Sri. S. Easwaran then proceeds to answer the submission of the learned Additional Advocate General that the 'First Charge' of the State over the property is not extinguished even if it is sold by the Bank/Financial Institution under the provisions of the SARFAESI Act or RDB Act by citing the judgments of the Hon'ble Supreme Court in Textile Labour Association and another v. Official Liquidator and Another (2004) 9 SCC 741), Maharashtra State Cooperative Bank Limited v. Assistant Provident Fund Commissioner and Others (2009) 10 SCC 123), Official Liquidator of Esskay Pharmaceuticals Limited (supra) and Jitendra Nath Singh v. Official Liquidator and Others (2013) 1 SCC 462), contending that in the afore judgments the Hon'ble Court has considered the concept of 'First Charge' vis-o?=-vis 'priority of payment', in the context of Sections 529 and 529A of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riority of payment', relying on National Iron Steel Rolling Corporation (supra) and State of M.P. and Another v. State Bank of Indore and Others (2002) 10 SCC 441) and asserted that, going by the ratio of these judgments, on account of the provisions of Section 26E of the SARFAESI Act and Section 31B of the RDB Act, the right of the Banks/Financial Institutions to proceed against the properties involved is absolutely protected in priority to all other debtors or claimants, including the Revenue. He concluded by showing me from the Black's Law dictionary (Centennial Edition) and the Law Lexicon by Sri. P. Ramanatha Aiyar (Reprint Edition 1987) that the word 'priority' has been defined as 'precedence and/or a legal preference in competing claims' and that as per these definitions, when two persons have similar rights in respect of the same subject matter, one being entitled to exercise his rights to the exclusion of the other, he is said to have 'priority' and that the Banks/Financial Institutions ineluctably obtain this 'priority' through the aforementioned provisions of the SARFAESI Act and the RDB Act. 23. He concludes by asserting that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the various learned counsel appearing for the Banks/financial Institutions in other cases have also made arguments on the same lines as afore, touching on the nuances of the principles recorded above and suffice to say, their common contention is that the rights of their clients to proceed against the properties involved in these cases are protected against such attempt by the Revenue. He further submits that like in many of the above cases, the Revenue has already taken possession of the properties, which his client claims to be the secured assets and therefore, that they are unable to conduct the sale. He adds that, in fact, in this particular case, this Court had passed two interim orders on 14.11.2018 and 12.02.2019 allowing joint sale of the property by the petitioner-Financial Institution and the Revenue but that it did not fructify since the upset price fixed, reckoning both the liabilities, did not attract the bidders. He thus prays that his client be allowed to sell the property and that the Revenue be directed to return possession of the same forthwith so as to enable them to do so. 26. As far as W.P.(C) Nos. 31945/2017, 37543/2017, 37552/2017 and 34002/2018 are conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same manner as a simple mortgagee would be entitled to under the various Sections of the TP Act. I say this is uncontestable because Section 100 of the TP Act excludes Mortgage from the definition of a Charge but makes all the provisions applicable to a simple mortgage relevant to a Charge. Further, as is manifest from the second limb of Section 100, a Charge gets extinguished when the property is transferred to another person who obtains it for consideration and without notice of the said Charge. Therefore, while every Mortgage is a Charge over the property, every Charge is not a Mortgage and does not create any rights over the same in favour of the charge holder. It is not necessary for me to labour on these any further, because I have the guidance of the judgment of the Hon'ble Supreme Court declaring these principles very lucidly in H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra), the relevant observations of which make these concepts absolutely certain and are, therefore, extracted as under: Under the general law relating to transfer of property, a charge does not give rise to a right in rem : the right is however more than a mere persona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (b) states what a simple mortgage is, namely, where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgage shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee. A charge on the other hand under Section 100 of the Act is neither a sale nor a mortgage because it creates no interest in or over a specific immoveable property but is only a security for the payment of money. 33. A close survey of the afore judgments thus renders it beyond contest that the words 'First Charge' and 'priority in payment of debts' are virtually synonymous and means the same, except for its semantic variation on account of differing phraseology. In both events, the holder obtains the privilege of recovery before anyone else and hence, whether it is the 'First Charge' or the right to claim 'Priority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecovery of dues of Sales Tax/Value Added Tax. The disposition of the Hon'ble Court in this area is lucid and available in paragraphs 126, 129 and 130 of the said judgment, which requires to be read in full and is, therefore, re-produced as under: 126. While enacting the DRT Act and the Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognised. If Parliament intended to create first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529 A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial pronouncements, dues of banks, financial institutions and other secured creditors should have priority over the State's statutory first charge in the matter of recovery of the dues of sales tax, etc. However, the fact of the matter is that no such provision has been incorporated in either of these enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory First Charge 'creates a right' for the State over the properties and that such right can be extinguished only if the Revenue sells the property and in no other manner. However, as has already been held by me above, the 'First Charge' claimed by the Revenue does not and cannot create any right over the property but only enables it to deal with the same as a simple mortgagee would be entitled to. Obviously, therefore, the contention of the Revenue built on 'a claim of right' over the properties fails, without any further requirement for expatiation; corollarily, enjoining me to consider if the provisions of the KGST Act/KVAT Act would still grant to the Revenue the First Right to proceed against it for recovery of the tax arrears. 40. It is here that the specific provisions of Section 26E of the SARFAESI Act and Section 31B of the RDB Act become necessary for a detailed evaluation. 41. As has been extracted above, Section 26E of the SARFAESI Act provides that the debts due to any secured creditor shall be paid in priority over all other debts and all revenue, taxes, cesses and other rates payable to the Central Government or State Government or Local ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mate claims in the event of the liquidation of the company and the assets of the company would remain charged for the payment of the workers' dues and such charge will be pari passu with the charge of the secured creditors. There is no other statutory provision overriding the claim of the secured creditors except Section 529-A. This section overrides preferential claims under Section 530 also. Under Section 529-A the dues of the workers and debts due to the secured creditors are to be treated pari passu and have to be treated as prior to all other dues. 44. Thereafter, in Maharashtra State Cooperative Bank Limited (supra), the Hon'ble Court alluded Textile Labour Association (supra) and re-affirmed the afore-extracted view, in paragraph 40 of the said judgment. 45. A year later, in 2011, the Hon'ble Court, in Official Liquidator of Esskay Pharmaceuticals Limited (supra) exhaustively went into the issues relating to the recovery of crown debts juxtaposed against Sections 529/529A of the Companies Act and Section 11(2) of the EPF Act and held that the provisions of the Companies Act and the EPF Act offer a statutory priority to the amounts payable under it notwiths ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the workmen in respect of their dues from the company and this charge is pari passu with that of the secured creditor and is to the extent of the workmen's portion in relation to the security of any secured creditor of the company as stated in clause (c) of sub-section (3) of Section 529 of the Companies Act. 47. The above cited judgments certainly support my views as afore and it axiomatically becomes justified for me to hold that Section 26E of the SARFAESI Act and Section 31B of the RDB Act create a 'First Charge' by way of a priority to the Banks/Financial Institutions to recover and satisfy their debts, notwithstanding any statutory 'First Charge' in favour of the Revenue under the KGST Act/KVAT Act. It is so declared. 48. My conclusions as afore being indited, it, normally, may not have been necessary to evaluate the submissions of the learned Counsel for the Banks/Financial Institutions with respect to the repugnancy between the Statutes involved or the principles of 'dominant legislation' and 'primacy to the Central Legislation under Articles 254 and 246(1) of the Constitution of India'. However, the submission of the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Parliament from enacting at any time, any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the State Legislature [emphasis supplied]. 61. The entire above discussion on Articles 245, 246, 250 and 251 is only to indicate that the word made has to be read in the context of the law-making process and, if so read, it is clear that to test repugnancy one has to go by the making of law and not by its commencement. 49. The above conclusions of the Hon'ble Court certainly places a lid on this argument made on behalf of the Revenue and in any event of the matter, they themselves concede that Section 31B of the RDB Act has been notified. Hence, even assuming and is taken that Section 26E of the SARFAESI Act cannot apply for want of notification, it would be of no avail to the Revenue, because the provisions of Section 31B of the RDB Act clearly place the right of the secured creditor to proceed against the property as well as their right to recover the secured debts in a position of priority over all tax arrears claimed by the Revenue. 50. That said, solely for the purpose of completing the narrative, if on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est Act, 2002 will prevail over all other laws that are inconsistent therewith. A middle ground has, therefore, necessarily to be taken. According to us, the two apparently conflicting sections can best be harmonised by giving meaning to both. This can only be done by limiting the scope of the expression or any other law for the time being in force contained in Section 37. This expression will, therefore, have to be held to mean other laws having relation to the securities market only, as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is the only other special law, apart from the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, dealing with recovery of debts due to banks and financial institutions. On this interpretation also, the Sick Industrial Companies (Special Provisions) Act, 1985 will not be included for the obvious reason that its primary objective is to rehabilitate sick industrial companies and not to deal with the securities market. 52. The position being ineluctably as above, as rightly pointed out by Sri. Madhu Radhakrishnan, the views of the other High Courts in The Indian Overseas B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the SARFAESI Act and RDB Act, notwithstanding Exhibit P6 attachment order issued by the first respondent; with a further direction that once the property is sold by the petitioner, the said attachment will be effaced by the competent authority, subject to the right of respondents 1 to 3 to proceed against any surplus after satisfaction of the petitioner's debt. (c) W.P.(C) No. 31945/2017 is allowed and the second and third respondents are directed to effect transfer of registry of the property involved in this case into the name of the petitioner consequent to the sale certificate issued in her favour by the fourth respondent and to permit her to remit the property tax due thereof; with a consequential direction to the third respondent to efface the attachments, if any, effected on the property by the Revenue thereafter. (d) W.P.(C) No. 37543/2017 is allowed quashing Exhibit P8 communication issued by the third respondent, with a resultant direction to the said respondent to register Exhibit P7 sale certificate de hors the attachment made by the Revenue and to efface the said attachment thereafter, with liberty being reserved to the Revenue to claim the balance cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent Bank is fully satisfied. (j) W.P.(C) No. 34380/2018 is allowed and Exhibit P3 will stand quashed and the fourth respondent is directed to register Exhibit P1 certificate, if not already done, subject to the satisfaction of the requisite stamp duty and all other formalities, with a further direction to the third respondent to effect transfer of registry of the property covered by Exhibit P1 sale certificate in favour of the auction purchaser and to permit him to remit the property tax after registration of the document is completed. (k) W.P.(C) No. 19639/2019 is allowed and Exhibit P1 will stand quashed, thus permitting the petitioner Bank to proceed against the property in question under the provisions of the SARFAESI Act and RDB Act de hors the attachment that may have been made on it by the Revenue; with an axiomatic declaration that the attachment, if any, made by the Revenue is only subservient to the right of the Bank and therefore, they can only claim the balance sale consideration, if any, after the debt of the petitioner is fully satisfied, consequent to the sale to be conducted by them. (l) W.P.(C) No. 28962/2017 will stand dismissed in view of the declarat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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