TMI Blog2021 (5) TMI 1026X X X X Extracts X X X X X X X X Extracts X X X X ..... tors were aware of the lacunae which were existing in the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, on account of which, the Banks/Financial Institutions were not having first charge by way of priority to recover and satisfy their debts visavis the Revenue in lieu of the statutory provisions contained in the Local Acts. It was to over ride this difficulty that the amendments were incorporated. A perusal of the provisions of Section 38 of the KVAT Act and Section 26 of the HP VAT Act demonstrates that these provisions are almost pari materia. This Court concurs with the reasoning of the Hon ble High Court of Kerala that after coming into force of Section 31B of the RDB Act read with Section 26E of the SARFAESI Act, the first charge is created by way of priority in favour of the Banks/Financial Institutions to recover and satisfy their debts, notwithstanding any local statutory first charge in favour of the Revenue - It is also necessary to take note of one fact that though Section 26E of the SARFAESI Act has come into force from 24.01.2020, yet the same will not have any effect on the issue of the Banks/Financial Institutions having first charge on the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondents No. 1 to 3 in this regard. 2. The case of the petitioners is that they are Body Corporates constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and are carrying on business as Bankers. Their grievance is primarily against respondents No. 1 to 3, who according to the petitioners have acted in contravention of law and failed to discharge their statutory duties. 3. Respondent No. 4, which is a private limited company, had started banking with petitioner No. 1 in the year 2004. Said respondent was released a cash credit hypothecation limit of Rs.140.00 lacs, cash credit (book debt) facility of Rs.100.00 lacs, term loan facility of Rs.1000.00 lacs, FLC DP within Term Loan of Rs.60.00 lacs and ILC/IFC facility of Rs.200.00 lacs by petitioner No. 1. In consideration thereof and in addition to the security documents having been executed, respondent No. 4 also created an equitable mortgage of its factory land and building. The facilities so extended to respondent No. 4 were enhanced on the request of respondent No. 4 and said respondent was also advanced financial facilities by way of cash credit against stock and book debts, te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial jurisdiction and was renumbered as OA No. 934 of 2017. Said Original Application was allowed by the learned Tribunal vide order dated 28.06.2017 and it was held by the Tribunal that respondent No. 4 was liable to pay and petitioner-Bank was entitled to recover an amount of Rs.220,27,83,199.99/alongwith simple interest @11% per annum on reducing balance with costs from 22.12.2015 from all the defendants therein till recoveries are effected (see Annexure P4). 8. To recover its outstanding dues, the petitioner simultaneously initiated proceedings under Section 13 of the Securitization and Reconstruction of Financial Assets Enforcement of Security Interest Act, 2002 (hereinafter referred to as the SARFAESI Act ). Notice under Section 13(2) of the Act dated 13.03.2015 was issued to respondent No. 4. As respondent No. 4 did not clear the outstanding dues within the statutory period of 60 days as per the mandate of the Act, petitioner-Bank acting within its rights, issued a Possession Notice and took possession of the Secured Assets . It put the said Secured Assets on auction vide e-Auction/ Sale Notice dated 03.06.2017, which was duly published in accordance with the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Himachal Pradesh General Sales Tax Act, 1968 read with Section 26 of the Himachal Pradesh Value Added Tax Act, 2005 (hereinafter referred to as the 2005 Act ), which by virtue of a non obstante provision overrides and creates a mandatory first charge upon the dealer. It was further the stand of the respondents that since the Government was having first charge upon the property of the said dealer, therefore, the petitioner Bank can not proceed with the sale of the assets. Respondent Department further mentioned in the Notice that in case the petitioner Bank had sold any plant and machinery or other capital goods lying in the said premises of respondent No. 4, then the Bank was liable to deposit the sale proceeds in the account of the State exchequer within 15 days from the date of receipt of Notice dated 24.06.2017, which is impugned by way of this petition as Annexure P10. 9. Feeling aggrieved, the petitioners have filed this writ petition, seeking for the quashing of Notice dated 24.06.2017 (Annexure P10), inter alia on the ground that the right of the petitioners to recover its outstanding dues from the defaulting borrower, as governed by the provisions of SARFAESI A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6(1) of the Constitution of India. Thus, as per the petitioners, they have the right to recover the outstanding dues flowing from the SARFAESI Act Act and the RDB Act and these Central Acts shall prevail over the State Acts to the extent of inconsistency. It is in this background that the petition has been filed praying for the reliefs already enumerated hereinabove. 11. The petition is opposed by respondents No. 1 to 3 on the strength of the reply filed by respondents No. 2 and 3, inter alia, on the ground that the statutory provisions of the Himachal Pradesh Value Added Tax Act, 2005, in view of the contents of Section 26 thereof, confer an overriding right in favour of the said respondents and, therefore, as an amount of Rs.33,46,84,420/was due from respondent No. 4 under the provisions of VAT Act, 2005 and Central Sales Tax Act, 1956, said respondents were having first charge over the concerned property. According to the revenue, the provisions of the 1993 Act and SARFAESI Act 2002 do not create any first charge in favour of the Banks, Financial Institutions or any other secured creditors, as has been held by the Hon ble Supreme Court in Central Bank of India Vs. State of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. Explanation .-For the purposes of this 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. This Section was incorporated by way of Enforcement of Security Interest and Recovery of Debts and Loans and Miscellaneous Provision (Amendment) Act, 2016. This Section has come into force w.e.f. 24th January, 2020. 19. Section 35 of the SARFAESI Act 2002 Act provides as under: 35. The provisions of this Act to override other laws: The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. 20. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a view to give the enacting part of the provision an overriding effect in case of a conflict. But the nonobstante clause need not necessarily and always be coextensive with the operative part so as to have the effect of cutting down the clear terms of an enactment and if the words of the enactment are clear and are capable of a clear interpretation on a plain and grammatical construction of the words the non-obstante clause cannot cut down the construction and restrict the scope of its operation. In such cases the non-obstante clause has to be read as clarifying the whole position and must be understood to have been incorporated in the enactment by the legislature by way of abundant caution and not by way of limiting the ambit and scope of the Special Rules .. 109. The committees headed by Shri T. Tiwari and Shri M. Narasimham suggested that the existing legal regime should be changed and special adjudicatory machinery be created for ensuring speedy recovery of the dues of banks and financial institutions. Narasimham and Andhyarujina Committees also suggested enactment of new legislation for securitisation and empowering the banks etc. to take possession of the securities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14A of the Workmen's Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift-Tax Act, and Section 529A of the Companies Act, 1956 would have been incorporated in the DRT Act and Securitisation Act. 130. Undisputedly, the two enactments do not contain provision similar to Workmen's Compensation Act, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the DRT Act and Securitisation Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other and the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rights of the Revenue created through the KGST Act/KVAT Act. In fact, this enquiry has been rendered relatively easy for this Court because, in Central Bank of India v. State of Kerala and Others ((2009) 4 SCC 94), the Honble 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 Honble Supreme Court are unequivocally worded that, in the absence of these provisions in the respective Statutes, the Banks/Financial Institutions cannot claim any priority over the Revenues First Charge on the properties concerned for recovery of dues of Sales Tax/Value Added Tax. The disposition of the Honble 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, reproduced 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 oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B Act, such Statutes do not, in any manner, operate to create a better right for recovery in favour of the Banks/Financial Institutions over that of the Revenue. However, these provisions were brought in and incorporated in the respective Statutes after this judgment, clearly with the intend to override this lacuna. Therefore, the resultant question is whether these provisions would create a better right in favour of the Banks/Financial Institutions, which is superior to that enjoyed by the Revenue under the KGST Act/KVAT Act. 39. The learned Additional Advocate General, as I have already seen above, has built his entire arguments on the assertion that the statutory 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 529 and 529A of the Companies Act, 1956 were closely examined and the Honble Supreme Court declared its ambit as under: The effect of Sections 529 and 529A is that the workmen of the company become secured creditors by operation of law to the extent of the workmens dues provided there exists secured creditor by contract. If there is no secured creditor then the workmen of the company become unsecured preferential creditors under Section 529A to the extent of the workmens dues. The purpose of Section 529A is to ensure that the workmen should not be deprived of their legitimate 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 529A. This section overrides preferential claims under Section 530 also. Under Section 529A 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 Coope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues and dues of the secured creditor which could not be realised because of the pari passu charge in favour of the workmen under the proviso to subsection (1) of Section 529 and only to the extent such dues rank pari passu with the dues of the workmen under clause (c) of the said proviso are paid in priority over all other dues. 16.2. Over the security of every secured creditor, a statutory charge has been created in the first limb of the proviso to clause (c) of subsection (1) of Section 529 of the Companies Act in 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 workmens 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the situation where State legislation is reserved and having obtained the Presidents assent, prevails in the State over the Central law. However, in view of the proviso to Article 254(2), Parliament could have brought a legislation even to override such assented to State Finance Act 7 of 2002 without waiting for the Kerala Finance Act 7 of 2002 to be brought into force as the said proviso states that nothing in Article 254(2) shall prevent 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 lawmaking 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 Honble 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the said expression, Section 35 will become completely otiose as all other laws will then be in addition to and not in derogation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. Obviously this could not have been the parliamentary intendment, after providing in Section 35 that the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 2006. Section 42(2) of the said Act reads as under: 42. Payment and recovery of tax, penalty, etc. (2) Any tax assessed on or has become payable by, or any other amount due under this Act from a dealer or person and any fee due from him under this Act, shall, subject to the claim of the Government in respect of land revenue and the claim of the Agriculture and Rural Development Bank in regard to the property mortgaged to it under subsection (2) of section 28 of the Tamil Nadu Cooperative Societies Act, 1983 (Tamil Nadu Act 30 of 1983), have priority over all other claims against the property of the said dealer or person and the same may without prejudice to any other mode of collection be recovered, (a) as land revenue, or (b) on application to any Magistrate, by such Magistrate as if it were a fine imposed by him: Provided that no proceedings for such recovery shall be taken or continued as long as he has, in regard to the payment of such tax, other amount or fee, as the case may be, complied with an order by any of the authorities to whom the dealer or person has appealed or applied for revision, under sections 51,52,54,57,58,59 or 60. 28. A reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with ''notwithstanding'' clause and has come into force from 01.09.2016. 4. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending. 5. The aforesaid would, thus, answer question (a) in favour of the financial institution, which is a secured creditor having the benefit of the mortgaged property. 6. In so far as question (b) is concerned, the same is stated to relate only to auction sales, which may be carried out in pursuance to the rights exercised by the secured creditor having a mortgage of the property. This aspect is also covered by the introduction of Section 31B, as it includes ''secured debts due and payable to them by sale of assets over which security interest is created''. 7. We, thus, answer the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/Financial Institutions and not the Revenue. However, it is important to state at this stage that there is a slight difference in the statutory provisions of Section 26 of the HP VAT Act visavis Section 37 of the Maharashtra Value Added Tax Act, 2002, which Section expressly also contains that the first charge on the property of the dealer of the State shall be subject to any provision regarding creation of first charge in any Central Act for the time being in force. 33. Be that as it may, a perusal of the judgment of the Hon ble High Court of Bombay demonstrates that it has taken into consideration the pronouncements of all other Hon ble Courts with regard to their respective VAT Acts, which contained a non obstante Clause in favour of the State akin to Section 26 of the H.P. VAT Act, 2005 visavis the amendments contained in the SARFAESI Act and the RDB Act 34. Thus, from what has been discussed above, now there is no ambiguity that in view of the provisions of Section 26E of the SARFAESI Act 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, a secured creditor has priority over the rights claimed by the Revenue. 35. During the course of arguments, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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