Case Law Details
Indian Overseas Bank Vs Assistant Commissioner (Madras High Court)
A recent judgment by the Madras High Court has tackled a critical issue – the priority of charge in debt realization. The case revolves around whether secured creditors take precedence over tax dues. In this article, we will explore the details of this case and its significance for debt recovery and legal precedence.
The primary issue at hand is determining which party holds priority when it comes to recovering debts – secured creditors or tax authorities. The secured creditors in question base their claim on the provisions of Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, commonly referred to as the “SARFAESI Act, 2002.”
On the contrary, the learned Additional Advocate General argues that “crown debt” holds the priority charge. To support this argument, they refer to a judgment from the Division Bench of the Bombay High Court, specifically the case of Medineutrina Pvt. Ltd. vs. District Industries Centre and Ors.
To address this fundamental legal question, the Full Bench of the Madras High Court framed specific issues for consideration. These issues encompass the priority charge of financial institutions acting as secured creditors compared to government departments responsible for tax collection. They also delve into the status and rights of a third-party purchaser of the mortgaged property.
The Full Bench’s ruling on the matter establishes that secured creditors have priority in realizing their secured debts. This priority extends to debts payable to them and is applicable when selling assets over which security interest is created. Notably, this priority supersedes all other debts and government dues, including revenues, taxes, cesses, and rates owed to the Central Government, State Government, or Local Authority.
The Bombay High Court, in the case of Jalgaon Janta Sahakari Bank Ltd. and Anr vs. Joint Commissioner of Sales and Anr, echoed this sentiment, emphasizing that secured creditors are entitled to the priority charge as outlined in Section 26E of the SARFAESI Act, 2002, provided their security is registered under Section 26B of the same Act.
In light of these significant judgments, it is clear that secured creditors take precedence over claims from Sales Tax, Commercial Tax, and Income Tax departments. This ruling reinforces the importance of securing debts and the legal rights of secured creditors.
In cases where auctions are conducted by secured creditors, and sale certificates are not registered, the Registering Authority has the authority to complete the registration, even in the face of attachment by tax departments. This underscores the efficiency of secured debt recovery.
Additionally, the judgment clarifies that secured creditors are obligated to remit any excess amounts received through auctions to the respective tax departments. However, they are not required to remit funds if the amount does not exceed their outstanding dues, protecting them from prosecution by tax authorities.
The Madras High Court’s judgment on the priority of charge for secured creditors in debt realization is a crucial clarification in the field of financial law. It reinforces the legal rights of secured creditors to recover their dues and establishes the priority of their claims over tax departments. This ruling ensures a more streamlined and transparent debt recovery process, benefiting both secured creditors and the legal system.
In summary, this judgment emphasizes the importance of adhering to legal processes and recognizing the rights of secured creditors in debt recovery proceedings. It serves as a reminder that the law prioritizes the transparent realization of secured debts, ultimately contributing to a fair and efficient financial system.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The issue involved in these present matters is priority of charge.
2. The secured creditors claim the priority of charge as against the Sales Tax, Commercial Tax and Income Tax dues. The secured creditors rely upon the provisions of Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity, hereinafter referred to as “the SARFAESI Act, 2002”).
3. Per contra, according to the learned Additional Advocate General, the crown debt has the priority charge. He relies upon the judgment of the Division Bench of the Bombay High Court in the case of Medineutrina Pvt. Ltd. vs District Industries Centre and Ors1.
4. The Full Bench of this Court, in the case of Assistant Commissioner (CT) Anna Salai-III Assessment Circle vs Indian Overseas Bank and Another2 has framed the following issues for consideration:
“a) As to whether the Financial Institution, which is a secured creditor, or the department of the Government concerned, would have the ‘Priority Charge” over the mortgaged property in question, with regard to the tax and other dues.
b) As to the status and the rights of a third party purchaser of the mortgaged property in question.”
5. The Full Bench of this Court, answered the reference and held that the rights of the secured creditors to realise 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.
6. The Full Bench of the Bombay High Court. In the case of Jalgaon Janta Sahakari Bank Ltd. and Anr vs Joint Commissioner of Sales and Anr3 held that the secured creditor would have the priority charge, as contemplated under Section 26E of the SARFAESI Act, 2002, in case the same is registered under Section 26B of the SARFAESI Act, 2002. The secured creditors, in these petitions claims that their security is registered under Section 26B of the SARFAESI Act, 2002.
7. In view of the Full Bench judgments, as referred to above, it is held that the secured creditor has priority charge over the claims of the Sales Tax, Commercial Tax and Income Tax.
8. In case auction is held by the secured creditors and the sale certificates are not placed and/or registered, then the Registering Authority may register the same, notwithstanding the attachment of Sales Tax, Income Tax or Commercial Tax Departments.
9. In case the auction sale is conducted by the secured creditor and they have received excess amount than their dues, then they are liable to remit the excess amount to the Departments. However, if they have not received the amount in excess of the amount due and payable to them, then they are not required to remit any amount to the Departments and the Departments cannot sustain prosecution against the Authorised Officer or the Officer of the secured creditor for not remitting the amount.
10. The present matters are disposed of in the above term. There will be no order as to costs. Consequently, W.M.P.Nos.21016, 21018, 26423, 26425 & 5170 of 2021, 20165 & 2929 of 2022 and 2761, 8171, 9444, 9445, 169 & 14075 of 2023 are closed.
Notes:-
1 AIR 2021 Bom 135
2 AIR 2017 Mad 67 (FB)
3 2022 Online SCC Bom 1767
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