Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2006 Supreme(Mad) 3531

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE P. SATHASIVAM, THE HONOURABLE MR. JUSTICE A. KULASEKARAN & THE HONOURABLE MR. JUSTICE S. TAMILVANAN
UTI Bank Ltd. - Appellant
Versus
The Deputy Commissioner of Central Excise Chennai & Another - Respondents
W.P.No.39536 of 2005 and W.P.M.P.No.42376 of 2005 & W.V.M.P.No.1536 of 2006
Decided On : 20 December 2006

Appearing Advocates:For the Petitioner:V.V. Sivakumar, Advocate. For the Respondents: V.T. Gopalan, Addl. Solicitor General assisted by P. Wilson, Asst. Solicitor General.

The main legal point established in the judgment is that the claim of a secured creditor will prevail over Crown debts in the absence of a specific provision in the statute claiming 'first charge' over the property.

Headnote:
Mandamus - Priority of Crown's debts over secured creditors - SARFAESI Act 2002 - Central Excise Act 1944 - Customs Act 1962 - 13(2) - 142(C) - 11 - 142 - Recovery of sums due to Government - Application of the provisions of Act 8 of 1878 to Central Excise Duties - Recovery of sums due to Government
Fact of the Case:

The petitioner, UTI Bank Ltd., sought a Writ of Mandamus to prevent the auction of a property for alleged dues payable by a debtor company, M/s.Sumeet Research and Holdings Private Limited. The petitioner had taken possession of the property under the SARFAESI Act 2002 after the borrower company failed to repay the amount. The Central Excise Department claimed priority over the secured creditor, alleging a statutory first charge over the property.
Finding of the Court:

The court found that the petitioner, being a secured creditor, was entitled to preference over the claim of the Deputy Commissioner of Central Excise. It held that the claim of the Central Excise Department did not have precedence over the claim of the secured creditor, and the petitioner was allowed to proceed with the property after clearance of its debt.
Issues: The main issue was whether the Crown's debts, for which there is no priority or charge created under the statute, should have precedence over the secured creditors.
Ratio Decidendi: The court held that generally, the dues to the Government get priority over ordinary debts, but only when there is a specific provision in the statute claiming 'first charge' over the property. Since there was no specific provision claiming 'first charge' in the Central Excise Act and the Customs Act, the claim of the secured creditor prevailed over Crown's debts.
Final Decision: The writ petition was allowed, and the petitioner UTI Bank, being a secured creditor, was entitled to have preference over the claim of the Deputy Commissioner of Central Excise Department. The first respondent was not entitled to bring the property into auction for their dues payable by the borrower company, and after clearance of the petitioner's debt, the first respondent was free to proceed further if any property was available.

Judgment :-

(Petition filed under Article 226 of the Constitution of India praying for issuance of a writ of Mandamus as stated therein.)

P. Sathasivam, J.

The Following question is referred to Full Bench for decision:-

‘Whether the Crown’s debts, for which there is no priority or charge is created under the statute, should have precedence over the secured creditors?’

2. Brief facts:

The petitioner, UTI Bank Ltd., has approached this Court to issue a Writ of Mandamus forbearing the first respondent - Deputy Commissioner of Central Excise, Chennai II Division and the second respondent - Secretary, Ministry of Finance, Government of India from bringing the property situated at Plot No.55, Ambattur Industrial Estate, Ambattur, Chennai 600 058 into auction for any alleged dues payable by the debtor company, namely M/s.Sumeet Research and Holdings Private Limited, since the said property has already been taken possession by the petitioner in pursuance to its statutory rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002) (in short ‘SARFAESI Act’).

3. M/s.Sumeet Research and Holdings Private Limited, (hereinafter called ‘the borrower company’) sought financial assistance from the writ petitioner/UTI Bank, of a sum of Rs.635 lakhs towards working capital besides term loan of Rs.150 lakhs, which was sanctioned by the Bank, as per Sanction Letter No.Adv./1650/2002-03 dated 28.9.2002. For the total working capital provided and enjoyed by the borrower, the borrower company had created a mortgage by deposit of title deeds, in respect of various properties, including the factory land and building situate at Plot Nos.54 and 55, Ambattur Industrial Estate, Ambattur, Chennai-58 (hereinafter referred to as Plot No.54 and Plot No.55 respectively).

4. The borrower company, despite requests and reminders, failed to repay the amount, which compelled the writ petitioner to take proceedings under the SARFAESI Act, and a notice issued under Section 13(2) of the SARFAESI Act on 17.4.2004. As there was no response from the borrower, after the lapse of time as provided under the statute, the petitioner Bank took constructive possession of the secured assets on 8.2.2005 as contemplated under the SARFAESI Act, and also took physical possession of the same on 29.3.2005.

5. In the meanwhile, the first respondent addressed a letter dated 28.3.2005 to the petitioner Bank informing that a sum of Rs.41,17,246/- was due and payable by the borrower company to the Department of Central Excise, and requested the writ petitioner to hold the money or property with it, as dues to the Department. The borrower company sold Plot No.54, and repaid a part of the amount due to the petitioner Bank and the property now available as secured asset, is the Unit at Plot No.55.

6. Under the provisions of the Central Excise Act, 1944, the first respondent did not have any statutory first charge over the property secured by the petitioner Bank. Ignoring the said settled position, the first respondent is taking action to sell the property, which is in possession of the writ petitioner, as if the first respondent is having first charge over the property, for the dues payable by the borrower, which is legally incorrect. Under these circumstances, the petitioner is constrained to file the writ petition, seeking the relief referred to above.

7. In the counter affidavit filed by the first respondent, it is alleged that the Central Excise Department can claim priority over the secured creditor/the petitioner Bank herein, who has exercised its powers under the provisions of the SARFAESI Act and this issue has already been settled by this Court and therefore, the writ petition is not maintainable and liable to be dismissed.

8. When the writ petition came up before M. Thanikachalam, J. the learned Judge, after hearing the arguments of both parties at length, and after noticing that two Division Bench decisions of this Cour

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