Pridhvi Asset Reconstruction and Securitisation Company Limited. Vs State of A.P. (Andhra Pradesh High Court)
The Andhra Pradesh High Court considered a writ petition challenging an auction notice issued by the Deputy Commercial Tax Officer-I, Chittoor, published in the Chittoor District Gazette on 16.11.2020, and an attachment notice dated 17.02.2020 issued under the A.P. Revenue Recovery Act, 1864.
The third respondent had borrowed funds from Andhra Bank by mortgaging the subject property on 16.03.2013. Following default, the account was classified as a Non-Performing Asset (NPA), and Andhra Bank initiated proceedings under Sections 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Subsequently, on 26.09.2017, Andhra Bank assigned the debt to the petitioner, an Asset Reconstruction and Securitisation Company. Thereafter, the Commercial Tax Department issued an attachment notice dated 17.02.2020 under Section 27 of the A.P. Revenue Recovery Act, followed by an auction notice proposing sale of the property.
The petitioner contended that the attachment and auction notices were illegal, arbitrary and violative of Article 14 of the Constitution of India. It submitted that it had informed the respondent authority about the existing security interest by letter dated 18.11.2020, but the authorities nevertheless proceeded with the auction. Reliance was placed upon an earlier Division Bench decision in W.P. No.43841 of 2018.
The Government Pleader contended that Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 were inapplicable to the facts of the case. It was argued that the statutory priority under Section 26E was available only for debts arising after the provision came into force and that the mortgage debt should yield to Crown debt coupled with charge.
The High Court framed two issues for consideration: whether the impugned proceedings were consistent with Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, and whether the Government Pleader’s contention that the petitioner’s rights must yield to Crown debt was sustainable.
The Court observed that there was no dispute regarding the mortgage created in favour of Andhra Bank, the initiation of proceedings under the SARFAESI Act, or the assignment of debt to the petitioner. Referring to Section 2(zd) of the SARFAESI Act, the Court held that the petitioner, being an Asset Reconstruction Company, clearly fell within the definition of a “secured creditor.” It also referred to the definition of “security interest” under Section 2(zf).
The Court examined Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, observing that both provisions contain analogous non obstante clauses and provide that, after registration of the security interest, debts due to secured creditors shall have priority over all other debts, including Government dues, taxes, cesses and other statutory liabilities. It held that the language of both provisions was clear and did not admit any alternative interpretation.
The Court further noted that the petitioner had informed the Commercial Tax Department of its security interest immediately after the auction notice was issued. It also referred to the earlier Division Bench decision in W.P. No.43841 of 2018, wherein it had been held that secured creditors have priority over mortgaged property and that revenue authorities do not enjoy priority of charge over such property.
Rejecting the Government Pleader’s submissions, the Court held that the contention that the mortgage should yield to Crown debt could not be sustained in view of Sections 26E and 31B. It also rejected the argument that the petitioner should be denied relief for not taking earlier steps after assignment of the debt. On the contention regarding prospective application of Sections 26E and 31B, the Court observed that neither provision makes any distinction based on the date of creation of the security interest and therefore rejected that contention as well.
Holding that the impugned action was neither sustainable nor tenable in law, the High Court allowed the writ petition at the admission stage. It set aside the auction notice published on 16.11.2020 and the attachment notice dated 17.02.2020. No order as to costs was made, and the pending miscellaneous petitions were directed to stand closed.
FULL TEXT OF THE JUDGMENT/ORDER OF ANDHRA PRADESH HIGH COURT
In the present writ petition, the challenge is to the auction notice issued by Deputy Commercial Tax Officer-I, Chittoor, published in the Chittoor District Gazette, vide Issue No.106/2020, dated 16-11-2020 and the attachment notice bearing No.29/2020, dated 17-02-2020 of the 2nd respondent.
2. The 3rd respondent herein borrowed amounts from Andhra Bank, Hosur Branch by mortgaging the subject property on 16-03-2013. In view of the default committed by the 3rd respondent, its account became “Non Performing Asset”. Thereafter, Andhra Bank pressed into service the provisions of the Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (‘Act”, for brevity) and issued notices under Sections 13(2) and (4) of the Act on 08-08-2016 and 18-07-2017 respectively. Subsequently, on 26-09-2017, Andhra Bank assigned the debt in favour of the petitioner herein, which is an Asset Reconstruction and Securitization Company. The 2nd respondent herein issued a notice of attachment of the subject land on 17-02-2020 under Section.27 of the A.P. Revenue Recovery Act,1864. Thereafter, the Deputy Commercial Tax Officer-I issued the impugned sale notice proposing to conduct public auction on 10-12-2020. The present writ petition challenges the validity and the legal sustainability of the notice of attachment, dated 17-02-2020 and the sale notice, dated 16-11-2020, issued under Section 36 of the A.P. Revenue Recovery Act,1864.
3. Heard Ms.V.Dyumani, learned counsel for the petitioner and Sri Y.N.Vivekananda, learned Government Pleader for Commercial Tax for respondents.
4. According to the learned counsel for the petitioner, the impugned notice of attachment and the sale notice are highly illegal, arbitrary and violative of Article 14 of the Constitution of India. It is also the submission of the learned counsel for the petitioner that though the petitioner herein, by way of a letter, dated 18-11-2020, brought to the notice of the 2nd respondent about the existence of the security interest, the respondent-authorities are not justified in proceeding with the auction. In support of her submissions and contentions, the learned counsel for the petitioner places reliance on the order of a Division Bench of this Court in W.P.No.43841 of 2018, dated 28-08-2019.
5. On the contrary, it is vehemently contended by the learned Government Pleader for Commercial Tax that the provisions of law on which the learned counsel for the petitioner seeks to place reliance have no relevance to the facts of the present case. It is also the submission of the learned Government Pleader that the benefit as provided under Section 26E of the Act can be extended only to the debts accrued after the advent of said provision of law. It is also the submission of the learned Government Pleader that the mortgage debt should necessarily yield to the crown debt coupled with charge and the petitioner-Asset Reconstruction Company cannot take advantage of the provisions of either Section 26-E of the Act or Section 31B of the Recovery of Debts and Bankruptcy Act,1993 ( for short “Bankruptcy Act”).
6. In the above backdrop, now the points that emerge for consideration of this court are:-
1. Whether the impugned proceedings issued by the 2nd respondent are sustainable and tenable and whether the same are in consonance with the provisions of Section 26E of the Act and Section 31B of the Bankruptcy Act?; and
2. Whether the contention of the learned Government Pleader that the right of the petitioner to yield to crown debt coupled with charge is sustainable and tenable?
7. There is absolutely no controversy with regard to the mortgage of property with Andhra Bank, Hosur Branch, by the 3rd respondent on 16-03-2013, the proceedings initiated by Andhra Bank under the provisions of the Act and the assignment of debt in favour of the petitioner herein. The petitioner herein is an Asset Reconstruction and Securitization Company registered under Section 3 of the Act. Clause (zd) of Section 2 of the Act defines the term “secured creditor” and the said provision of law reads as under:-
“Secured Creditor means:-
i) any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l);
ii. debenture trustee appointed by any bank or financial institution; or
iii. an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or
iv. debenture trustee registered with the Board appointed by any company for secured debt securities; or
v. any other trustee holding securities on behalf of abank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.
It is very much clear from a reading of the above provision of law that Asset Reconstruction Company is also a secured creditor, as such, the petitioner herein is undoubtedly a secured creditor.
8. It is also important to note the definition of “security interest”.
Section 2(zf) of the Act defines “security interest”, which reads as under:-
“security interest” means right, title or interest of any kind, other than those
specified in section 31, upon property created in favour of any secured creditor and includes—
i. any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or
ii. Such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset;
9. In order to examine and adjudicate the issues in the present writ petition, it would be highly apposite and appropriate to refer to the provisions of Section 26E of the Act and Section 31B of the Bankruptcy Act. Section 26E of the Act, which deals with the priority to secured creditors and which came into force w.e.f. 24-01-2020 by way of a Gazette Notification, reads as under:-
Section 26 E : 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 purpose of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code,1016, 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 the Code.”
Section 31B of the Bankruptcy Act reads as under:-
31 B. Priority to secured creditors. – Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central government, 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 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
10. A reading of the above provisions of law makes it abundantly clear that the said provisions are analogous though under two different legislations. Section 26E of the Act, which came into force w.e.f 24-012020 begins with ‘non obstante’ clause and stipulates that after registration of the 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 or State Governments or local authority. Section.31B of the Bankruptcy Act is also to the same effect. When the language of the provisions of law is very lucid and clear, no other interpretation is possible.
11. In the instant case, the 3rd respondent created mortgage over the subject property by way of a registered deed in favour of Andhra Bank as long back as on 16-03-2013 and as the account of the loanee became NPA on 31-07-2016, the Bank authorities initiated action under the provisions of the Act by issuing notices under Section 13(2) and (4) of the Act. It is absolutely not in controversy that the petitioner herein clearly falls under the definition of “secured creditor” as defined under Section 2(zd) of the Act, since the petitioner herein is an Asset Reconstruction Company in whose favour Andhra Bank assigned the debt by way of registered document on 26-09-2017. In fact, the material available on record further reveals that on 18-11- 2020 i.e., immediately after the sale notice came to be issued by the 2nd respondent, the petitioner herein brought to the notice of the Office of the 2nd respondent about the existence of the security interest in favour of the petitioner herein. In fact, when the provisions of Section 26E of the Act and 31B of the Bankruptcy Act fell for consideration of this court in W.P.No.43841 of 2018, when the registering authority failed to register the sale certificate, a Division Bench of this court, while holding that the secured creditor would have the priority of the charge over the mortgaged property, allowed the said writ petition directing the registering authority to register the sale certificate. In the said judgment, the Division Bench also held that the revenue has no priority of charge over the mortgaged property in question. Having regard to the language employed in Section 26E of the Act and 31B of the Bankruptcy Act, the contention of the learned Government Pleader that mortgage in favour of the petitioner herein should yield to crown debt coupled with charge cannot be sustained in the eye of law.
12. Submission of the learned Government Pleader that since the petitioner-institution did not take any steps pursuant to the assignment of debt in its favour, it is liable to be non-suited, is also not tenable having regard to the above said provision of law. With regard to the contention of the learned Government Pleader on the prospective application of the provisions of Section 26E of the Act and Section 31B of the Bankruptcy Act, it is to be noted that the said provisions do not make any distinction to the said effect. Accordingly, the said contention is also rejected.
13. Therefore, in view of the above reasons, this court has absolutely no scintilla of hesitation to hold that the impugned action is neither sustainable nor tenable in the eye of law.
For the aforesaid reasons, the writ petition is allowed, at the stage of admission, setting aside the auction notice issued by the Deputy Commercial Tax Officer-I, Chittoor, published in the Chittoor District Gazette vide Issue No.106/2020, dated 16-11-2020 and the attachment notice bearing No.29/2020, dated 17-02-2020 of the 2nd respondent. No order as to costs.
Miscellaneous Petitions pending, if any, shall stand closed in consequence.
