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IN THE HIGH COURT OF KERALA AT ERNAKULAM
S. MANIKUMAR, SHAJI P. CHALY, JJ.
THE TAHSILDAR, KOLLAM – Appellant
Versus
NIZAMUDEEN S. – Respondent
W.A. Nos. 2114, 2449 of 2019, 132, 133, 144, 204, 241 of 2020, 616, 1096, 1655 of 2021, 620, 652, 659, 723, 817 of 2022
Decided On : 06-01-2023
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 26E - Recovery of Debts and Bankruptcy Act, 1993 - Section 31B - Kerala General Sales Tax Act, 1963 - Kerala Value Added Tax Act, 2003 - Sales Tax - Recover - Arrears - Amounts are due from various registered dealers 21- Under state laws, who have availed loans from various financial institutions - Proceedings were initiated as per provisions of Kerala General Sales Tax Act, 1963 (KGST Act, 1963) and Kerala Value Added Tax Act, 2003 (KVAT Act, 2003) to recover amounts due to Government - When steps were taken to register documents pertaining to properties sold by Banks under provisions of SARFAESI Act, 2002 the RDB Act, 1993, Registration department raised objections and issued auction purchasers have sought direction to registrars to register sale certificates in favour of purchasers - Whether first charge created under statutes referred to above would still continue to run with properties sold - Said provision specifies that notwithstanding anything contained in any other law for time being in force, after registration of security interest, 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 Central Government or State Government or local authority.
Findings of the Court:
Therefore under no circumstances it can be legally presumed that parliament ever thought of realising amounts due under a mortgage giving an absolute go by to statutory charge created by Central and State enactments - That apart since Section 26E makes it clear that Bank is entitled only for a priority in payment alone, it can never be said to be a charge created over property against statutory charge contained under KGST Act, 1963 and KVAT Act, 2003 or any Central enactment - In Court view, would be more clear from explanation contained under Section 26E which states that for purpose of said Section, it is hereby clarified that on or after 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 borrower, priority to secured creditors in payment of debt shall be subject to provisions of that Code - Above is a clear indication that it cannot be said that merely because a priority in payment is available to financial institutions, statutory charge created under various enactments vanishes.
Result: Writ Appeals are allowed.
JUDGMENT :
SHAJI P. CHALY, J.
1. The captioned writ appeals are filed by the State and its officials challenging the common judgment of the learned Single Judge in W.P. (C) Nos. 28316 of 2016 and other connected matters dated 30.07.2019, whereby the writ petitions filed by the financial institutions guided by the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) are allowed; and held that a secured creditor under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act, 1993) obtains priority over the right claimed by the Revenue, both in proceeding against the properties in question, or in recovering the secured debt, and accordingly quashed the proceedings initiated by the sales tax authorities and the registration authorities.
2. Admittedly, amounts are due from various registered dealers, under the state laws, who have availed loans from various financial institutions. Proceedings were initiated as per the provisions of the Kerala General Sales Tax Act, 1963 (KGST Act, 1963) and the Kerala Value Added Tax Act, 2003 (KVAT Act, 2003) to recover the amounts due to the Government. Therefore when steps were taken to register the documents pertaining to the properties sold by the Banks under the provisions of the SARFAESI Act, 2002/the RDB Act, 1993, the Registration department raised objections and issued proceedings conveying that, since amounts are due to the State Government, as per the provisions of the statutes referred to above first charge is created over the properties and therefore documents cannot be registered, as per the provisions of the Registration Act, 1908.
3. In some of the cases, the auction purchasers have sought direction to the registrars to register the sale certificates in favour of the purchasers. In some of the cases, the State Government has proceeded against the properties which are mortgaged to the financial institutions to recover the arrears of sales tax and value added tax invoking the provisions of the Kerala Revenue Recovery Act, 1968. The Banks/financial institutions are claiming that they have the right as secured creditors to proceed against the properties in question in terms of the provisions of Section 26E of the SARFAESI Act, 2002 and Section 31B of the RDB Act, 1993, and the statutory charges as per the state acts no longer survive.
4. But, at the same time, the Revenue/Finance Department of the State claims first charge over the properties under the provisions of Section 26B of the KGST Act, 1963 and Section 38 of the KVAT Act, 2003. The issue therefore, by and between the financial institutions and the State Government with respect to the rival claims, is as to who has the right to proceed against the property, and further, if the Bank has sold any property whether the first charge created under the statutes referred to above would still continue to run with the properties sold.
5. We have heard learned Special Government Pleader Sri. Mohammed Rafiq, learned Senior Government Pleader Sri. Jaffer Khan and learned Government Pleader Smt. Reshmitha R. Chandran for the appellant State and its officials, Sri. S. Easwaran, learned counsel for the State Bank of India, Sri. P. Paulochan Antony, learned counsel for Dewan Housing Finance Corporation Limited, Sri. Adarsh Kumar and Sri. K.M. Aneesh, learned counsel for the Bank of Baroda, Sri. Mohan Jacob George, learned counsel for M/s. Indiabulls Asset Reconstruction Company Limited, Sri. Sergi Joseph Thomas, learned counsel for M/s Arams Tourism Private Limited, Smt. Renee Joshua and Sri. Saiju Sathyapalan, Sri. L. Rajesh Narayanan, learned counsel for Smt. Laija Nawabuddin and Sri. Madhu Radhakrishnan, learned counsel for M/s. Asset Reconstruction Company (India) Ltd. and perused the pleadings and material on record.
6. Section 26E contained under Chapter IV-A of the SARFAESI Act 2002 was brought into force with
Bank is entitled only for a priority in payment alone, it can never be said to be a charge created over property against statutory charge contained under KGST Act, 1963 and KVAT Act, 2003 or any Cent....
The provisions of Section 26E of the SARFAESI Act 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 create "First Charge" by way of priority in favour of the Banks and Financial ....
Section 26E of the SARFAESI Act establishes that secured creditors have priority over State revenue claims, reinforcing the enforceability of secured debts post-registration.
Secured creditors have priority over State debts under Section 26E of the SARFAESI Act, 2002, invalidating conflicting State charges on mortgaged assets.
Secured creditors' debts take precedence over state tax claims, as established by Section 26E of the SARFAESI Act.
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