TMI Blog2024 (3) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... forcing recovery of their claims. Dues owed to banks, if not paid, can have a harsher and wider adverse social impact. A collapse of banks would not only hurt the interests of various depositors but also inflict a wider deleterious impact on other segments of the economy. Potentially, it would be tax-payers funds that would have to be infused into the banks to bail them out to avoid such adverse social impact. On the other hand, if the banks are given a priority in recovery, and in the process, the secured assets are sold without hindrance to an auction purchaser, such asset would continue to be put to economic use, which would also generate tax revenues. In addition, other assets that are not the subject matter of a security interest registered prior in time can continue to be proceeded against in enforcement proceedings to recover tax dues. The issue at hand has been extensively analysed in the case of Jalgaon Janta Sahakari Bank [ 2022 (9) TMI 163 - BOMBAY HIGH COURT ]. Examining multiple fiscal statutes that create a statutory charge over assets of an assessee and their interplay with Section 26-E of the SARFAESI Act where such assessee has created a security interest in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Respondent No. 1, Deputy Commissioner of State Tax, GST Department, Government of Maharashtra and Respondent No. 2, the State Tax Officer, Raigad Division, under the Maharashtra Value Added Tax Act, 2002 ( MVAT Act ). Such attachment and consequential enforcement are directed against immovable property that was mortgaged way back in 2014, by Respondent No. 3, Savair Energy Ltd. ( Borrower ) in favour of a consortium of banks led by the Petitioner, Indian Overseas Bank ( IOB ). 3. For reasons set out in this judgement, we hold that such enforcement action by Respondent Nos. 1 and 2 ( MVAT Authorities ) is in direct conflict with the explicit provisions of Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI Act ) read with Section 37 of the MVAT Act. Factual Matrix: 4. A brief narration of facts relevant for disposing of this petition may be summarised thus: a) The Borrower availed of credit facilities from a consortium of banks led by the Petitioner. Various loan and security documents were executed among them from time to time; b) The security interest of these secured creditors included a mortgage ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued to the Borrower; ii. letters dated 20th June, 2023 and 21st June, 2023 by Respondent No. 1 asserting to the Petitioner, that recovery of sales tax dues to the tune of Rs. 16.61 crores, enjoys the first charge over properties of the Borrower under Section 37 of the MVAT Act, and that Section 38 of the MVAT Act voids fraudulent transfers. Accordingly, the MVAT Authorities called upon the Petitioner not to auction the Secured Assets, and asserted that if any amounts were to be recovered, the proceeds should first be appropriated towards sales tax dues in full; iii. email dated 14th July, 2023 to the Petitioner, along with an attachment order dated 24th February, 2022 that had been issued to the Borrower to attach inter alia the Secured Assets, and drawing the Petitioner s attention to the fact that such an attachment over the Secured Assets had already been in place; iv. summonses dated 26th July, 2023 and 31st July, 2023 issued to the Petitioner, calling for documents and records relating to the attempts to auction the Secured Assets; v. attachment order dated 31st July, 2023, attaching a bank account earmarked by the Petitioner for receipt of proceeds in the conduct of the aucti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the clear position in law, the disruptive intervention by the MVAT Authorities is frustrating the smooth conduct of the auction and appropriate price discovery, resulting in multiple failures of attempts to auction the Secured Assets. MVAT Authorities Submissions: 9. A common affidavit in reply filed by the MVAT Authorities and the Government of Maharashtra (Respondent No. 3) states that the dues owed by the Borrower include MVAT dues of Rs. 16.10 crores (before the introduction of the Goods and Services Tax) and dues of Rs. 1.10 crores (after such introduction). The period to which the dues pertain ranges from 2006-07 to 2018-19, and the adjudication orders are all passed between 28th January, 2019 and 25th March, 2022. 10. Mrs. Vyas, learned counsel appearing on behalf of the MVAT Authorities would submit that the attachments were effected prior to the auction by the Petitioner and therefore, even before the auction was conducted, the Secured Assets stood attached. Mrs. Vyas would submit that the Petitioner had been put to notice by the MVAT Authorities that they claimed a first charge over the Secured Assets. Yet, the Petitioner went ahead with attempts to auction the Secured As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as defined in clause (zd) of sub-section (1) of section 2, for creation, modification or satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by such creditor to the borrower. (2) From the date of notification under sub-section (1), any creditor including the secured creditor may file particulars of transactions of creation, modification or satisfaction of any security interest with the Central Registry in such form and manner as may be prescribed. (3) A creditor other than the secured creditor filing particulars of transactions of creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under this Act. (4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attachment orders respectively with CERSAI. Such registration is a constructive public notice of the charge over the property in question. The ranking of priority of competing charges so registered would be in the sequential order of the registration. The registrant with a prior registration would have priority over subsequent registrants. Without such registration, the secured creditor shall not have the right to take enforcement action under the SARFAESI Act. 15. Against such context, the provisions of Section 26-E are extracted below:- 26-E. Priority to secured creditors.-- Notwithstanding anything contained in any other law for the time being in force, after the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bruary, 2022. The earliest adjudication order that provided the basis for an attachment, as seen from the affidavit in reply, was passed on 28th January, 2019. Without even going into whether an attachment order by the MVAT Authorities is itself a security interest capable of being registered with CERSAI (we deal with this issue later), on a mere chronological reading of the facts, it would follow that the mortgage over the Secured Assets was effected well before any adjudication order, leave alone, any attachment order passed by MVAT Authorities. Therefore, it is established as a matter of fact, that nearly five years before the MVAT Authorities passed the very first adjudication order demanding tax, and nearly seven years before the first attachment order was passed, the mortgage in favour of the Petitioner-led consortium of banks had been created and registered with CERSAI. Such prior registration accorded the Petitioner-led consortium the entitlement to priority under Section 26-C(2) of the SARFAESI Act, read with Section 26-E, no sooner than these provisions were brought into force on 24th January, 2020. Section 37 of the MVAT Act: 19. Next, it would be instructive to notice S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t go towards discharging the dues owed to the secured creditor. It is only the residue, if any, after discharging the dues of the mortgagee, that may flow to the MVAT Authorities. Once the mortgage is enforced, there would be no asset left to exercise any charge over and the charge would move to the proceeds of the enforcement of the mortgage. The proceeds of enforcement of the mortgage would go towards discharging the mortgagee with highest priority in full, and only the remainder, if any, of the proceeds would then go to the person next in priority. 23. Therefore, the MVAT Authorities claim that they have a charge in priority to the secured creditors whose security interest is actually registered earlier in time with CERSAI, is untenable. Such a stance would turn on its head, a carefully devised statutory scheme of priority of dues. 24. It is also noteworthy that the first of the seven auction attempts was on 29th March, 2022 i.e. well after Section 26-E of the SARFAESI Act came into force on 24th January, 2020. The Petitioner was a protectee of the provisions of Section 26-C and Section 26-E, with effect from 24th January, 2020. Therefore, when the Petitioner took its first step ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover their dues in accordance with law. 27. Therefore, we are not persuaded by the argument that a grave and unintended outcome of wiping out liabilities owed to the MVAT Authorities would be visited upon them. In fact, the formulation of the two provisions in the SARFAESI Act and the MVAT Act respectively, is a conscious policy choice of balancing of interests of competing creditors who have finite assets to pursue in enforcing recovery of their claims. Dues owed to banks, if not paid, can have a harsher and wider adverse social impact. A collapse of banks would not only hurt the interests of various depositors but also inflict a wider deleterious impact on other segments of the economy. Potentially, it would be tax-payers funds that would have to be infused into the banks to bail them out to avoid such adverse social impact. On the other hand, if the banks are given a priority in recovery, and in the process, the secured assets are sold without hindrance to an auction purchaser, such asset would continue to be put to economic use, which would also generate tax revenues. In addition, other assets that are not the subject matter of a security interest registered prior in time can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te or subservient to a paramount charge such as arrears of land revenue. We, therefore, are unable to accept the argument of the State/respondents that since neither the SARFAESI Act nor the RDDB Act uses the words first charge but the word priority , such priority cannot have precedence over first charge created by the State legislations. 83. However, notwithstanding that section 169(1) of the MLR Code is the dominant legislation and does not expressly say that it would be subordinate or subservient to any Central Act creating first charge , nothing really turns on it. The express language of section 26-E of the SARFAESI Act and section 31B of the RDDB Act, wherever applicable, is sufficient to off-set the paramount charge created by sub-section (1) of section 169. Similarly, even if there were no express intendment in the relevant provisions of the BST Act (section 38C) and the MVAT Act (section 37) to the effect that such provisions would be subordinate to any Central Act creating first charge , the same would obviously have to be read, invoked and exercised subject to section 26-E of the SARFAESI Act and section 31B of the RDDB Act, wherever applicable. 84. The fact that the BS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l authority but also those payable to the Central Government that would have to stand in the queue after the secured creditor for payment of its dues. 89. The effect of using the word priority in section 26-E of the SARFAESI Act, according to us, is this. The rights accorded to first charge holders by Central as well as State legislation having been known to the Parliament, in such a situation, what the Parliament intended by exercising its legislative power by introducing amendments in the SARFAESI Act, more particularly by incorporating section 26-E therein, was to explicitly make the valuable right of the first charge holder subordinate to the dues of a second creditor. The rights of such of the first charge holders accorded by several legislations enacted by the State, having regard to the language in which section 26-E is couched, would rank subordinate to the right of the secured creditor as defined in section 2(1)(zd) subject, of course, to compliance with the other provisions of the statute. Acceptance of the contra-arguments of learned counsel for the State/respondents would undo what the Parliament has chosen to do. 90. We may answer the question from a different angle. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Petitioner from conducting the auction and invoking Section 37 and Section 38 of the MVAT Act, the law was well declared in Jalgaon Janta Sahakari Bank. Therefore, the assertion of the MVAT Authorities that they had priority over secured creditors was totally misconceived and without basis in law. Statutory authorities enforcing law must necessarily refrain from conducting themselves in a manner that conflicts with the law declared by a Full Bench of a constitutional court. We have no hesitation in declaring that none of the attachment orders can result in the MVAT Authorities stealing a march in priority over the registered security interest enjoyed by the Petitioner-led consortium of banks. Medineutrina and its effect : 31. We also find that Mrs. Vyas reliance on Medineutrina is totally misplaced. First, Medineutrina was rendered by a two-judge Division Bench prior to Jalgaon Janta Sahakari Bank , which was rendered by a Full Bench. Second, the Full Bench indeed noticed Medineutrina and analysed its contents while declaring the law emphatically, also taking note of the fact that Paragraph 41 of Medineutrina (the paragraph that summarises all the findings and consequential dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge is over the asset. Once the security interest is enforced, the asset would no longer be available for further enforcement. The proposition canvassed by Mrs. Vyas would render Section 26-E meaningless, because if that were the legal position, the creation of priority in favour of the secured creditor would have no meaning. Put differently, according to the proposition suggested, the secured creditor would first enforce its charge against the asset and thereafter the MVAT Authorities would yet again enforce their charge against the very same asset to recover their dues. Thereafter if there are other security interests with an inferior priority, every single beneficiary of every such security interest would keep enforcing their security interest against the very same asset. Such an absurd proposition turns on its head, the very meaning of having a security interest over an asset in priority over others. Needless to say, no person in his right mind would ever bid for an asset against which enforcement of multiple charges is contemplated. This because he would have to face the endless queue of subsequent enforcement actions against the very same asset. To underline the absurdity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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