Indian Overseas Bank Vs Assistant Commissioner of Central Excise and service Tax (Madras High Court)
Madras High Court held that once the purchaser has purchased the property even after knowing about the encumbrances then it is his obligation to discharge the encumbrances. The Bank cannot file a writ petition so as to protect the interest of the third party, who has purchased the property knowing the fact that there are other encumbrances.
Facts- The petitioner is the Indian Overseas Bank, Asset Recovery Management Branch. The 2nd respondent had purchased the land and building together with plant, machineries, accessories etc., belonging to M/s.Tamil Nadu Sponge Limited.
The 2nd respondent-Company had availed various credit facilities from the petitioner-Bank from time to time in order to run its business operations on the aforesaid property. The 2nd respondent had defaulted in repaying the loan amount, and the loan accounts were slipped into NPA category on 31.12.2023 in terms of Reserve Bank of India (RBI) guidelines.
The 2nd respondent-Company had become non-functional ever since from the year 2014 onwards and virtually defunct due to stoppage of business operations. The Guarantors also had failed and neglected to repay the outstanding loan amount. The petitioner-Bank had invoked SARFAESI actions and thus, caused demand notice u/s. 13(2) of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, on 21.02.2014 to the 2nd respondent and the possession had been taken by the petitioner-Bank. The Bank continued its actions under the SARFAESI to recover the huge outstanding loan amount of Rs.216,63,91,070.59/- as on 21.02.2014. The petitioner-Bank has so far caused more than 10 notices to auction the secured property belonging to the 2nd respondent but could not be sold for want of bidders mainly due to the attachment effected by the 1st respondent / Assistant Commissioner of Central Excise and Service Tax towards its dues.
The petitioner-Bank mainly contended that they are struggling to auction the secured properties because of the attachment made by the 1st respondent. They are unable to register the sale deed and necessary entries are not made in the Encumbrance Certificate.
The 1st respondent being an un-secured creditor does not have precedent over the secured creditor in the light of Section 26-E of the SARFAESI Act and Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993.
Conclusion- Held that the third party auction purchaser, knowing the encumbrances notified by the secured creditor, has purchased the property through public auction. When the purchaser is aware of the encumbrances, then he has to discharge the encumbrances and convert the sale free from encumbrances for the purpose of registering the sale certificate or for alienating the property. Once the purchaser has the knowledge about the encumbrances and purchased the property through auction, then it is his obligation to discharge the encumbrances and convert the encumbered property free from encumbrances. The Bank cannot file a writ petition so as to protect the interest of the third party, who has purchased the property knowing the fact that there are other encumbrances.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The list on hand has been instituted to direct the 1st respondent to remove the attachment effected on 03.12.2014, as mentioned in the Encumbrance Certificate, with the Office of the 3rd respondent, in respect of secured property belonging to the 2nd respondent, so as to enable the petitioner Bank to register the sale certificate / sale deed in favour of auction purchaser / third party(s) in accordance with law.
Facts of the Case:
2.The petitioner is the Indian Overseas Bank, Asset Recovery Management Branch. The 2nd respondent had purchased the land and building together with plant, machineries, accessories etc., belonging to M/s.Tamil Nadu Sponge Limited, pursuant to the sealed tender invited by DRT, Coimbatore in TA.No.995/2002, which was filed by ICICI Bank Limited, IDBI and IFCI. The DRT, Coimbatore had received 16 tenders and out of which the 2nd respondent-Company was declared as highest bidder and on remittance of entire sale price, the DRT, Coimbatore issued sale certificate on 30.09.2003 in favour of the 2nd respondent.
3. The sale certificate was duly registered as Document No.566/2004 SRO, Omalur in favour of the 2nd respondent, in respect of the properties morefully described in the affidavit filed in support of the writ petition.
4. The 2nd respondent-Company had availed various credit facilities from the petitioner-Bank from time to time in order to run its business operations on the aforesaid property and the last credit facilities, namely, cash credit facility, working capital demand loan, term loan (9Nos) LG, LC and A & E were extended by the petitioner-Bank for Rs.241.52 Crores and in order to secure the aforesaid credit facilities, the 2nd respondent had created primary security on hypothecation of stocks, stocks in trade, book debts, receivables, consumables and collateral security for the aforesaid property. Besides, the aforesaid property belonging to the 2nd respondent and guarantors also offered some immovable properties to secure the immovable properties. The 2nd respondent had defaulted in repaying the loan amount, and the loan accounts were slipped into NPA category on 31.12.2023 in terms of Reserve Bank of India (RBI) guidelines. The 2nd respondent-Company had become non-functional ever since from the year 2014 onwards and virtually defunct due to stoppage of business operations. The Guarantors also had failed and neglected to repay the outstanding loan amount. The petitioner-Bank had invoked SARFAESI actions and thus, caused demand notice under Section 13(2) of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, on 21.02.2014 to the 2nd respondent and the possession had been taken by the petitioner-Bank. The Bank continued its actions under the SARFAESI to recover the huge outstanding loan amount of Rs.216,63,91,070.59/- as on 21.02.2014. The petitioner-Bank has so far caused more than 10 notices to auction the secured property belonging to the 2nd respondent but could not be sold for want of bidders mainly due to the attachment effected by the 1st respondent / Assistant Commissioner of Central Excise and Service Tax towards its dues.
5. The petitioner-Bank had so far sold the secured properties belonging to the guarantors and recovered only a sum of Rs.51,79,77,500/-as against the staggering outstanding amount of Rs.216,63,91,070.59 as on 21.02.2014.
6. The petitioner-Bank mainly contended that they are struggling to auction the secured properties beacuae of the attachment made by the 1st respondent. They are unable to register the sale deed and necessary entries are not made in the Encumbrance Certificate. Thus, the 3rd party purchasers are unable to deal with the properties, which they purchased through public auction conducted by the Bank. The respondent is not having any priority over the debts of the creditor. The petitioner-Bank admittedly is the secured creditor and hold first charge over the debts. More so, the dues to the Bank itself has not been realised and thus, question of clearing the dues to the other creditors does not arise at all.
7. The 1st respondent being an un-secured creditor does not have precedent over the secured creditor in the light of Section 26-E of the SARFAESI Act and Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993.
8. As per Section 142-A of the Customs Act, the petitioner is entitled to have first charge over the debts and knowing the fact that the 1st respondent, being an unsecured creditor, the attachment was made by the 1st respondent and therefore, the present writ petition is to be considered.
9. The petitioner states that in the absence of specific provisions in the Central Excise Act as well as in Customs Act, the claim of secured creditor will prevail over Crown’s debts. The petitioner-Bank being a secured creditor, the Deputy Commissioner of Central Excise is not entitled to bring the property in auction. The petitioner-Bank had sent letters to the 1st respondent to lift the attachment on the secured property. But the first respondent refused to do so. Thus, the petitioner is constrained to move the present writ petition.
10. The learned counsel, appearing on behalf of the petitioner, mainly contended that the current dues to the Bank is Rs.714.39 Crores as on 29.03.2022 and the auction purchaser has knocked down the bid for Rs.105.38 Crores for the secured property attached by the 1st respondent. The borrower has to pay substantial amount to the petitioner-Bank and there is no sufficient security available to the petitioner-Bank to recover the outstanding dues. The petitioner-Bank had caused a sale notice on 09.03.2022 to bring the secured assets of E-Auction 2022 in order to recover the outstanding loan amount of Rs.714.39 Crores as on 29.03.2022. The petitioner-Bank has duly informed the public about the dues claimed by the Commercial Tax Department, Central Excise and Service Tax Department. It is specifically mentioned that the Bank dues will be appropriated as per the provisions of the law and the Bank dues will be given priority over the Statutory Rules. The petitioner-Bank has to appropriate the sale proceeds in terms of Section 38(7) of SARFAESI Act. On account of non-lifting of the attachment by the 1st respondent, the petitioner-Bank is unable to proceed further and realise the loan dues.
11. In support of the contentions, raised by the petitioner, the learned counsel for the petitioner made the following legal submissions.
“i) UTI bank Ltd vs. Deputy Commissioner, Central Excise, 2006 SCC online Madras 1182.
The Hon’ble Full Bench of this Hon’ble High Court observed as follows:
“Para No.25 In the case on hand, the petitioner bank which took possession of the property under Section 13 of the SARFAESI Act, being a special enactment, undoubtedly is a secured creditor. We have already referred to the provisions of the Central Excise Act and the Customs Act. They envisage procedures to be followed and how the amounts due to the Department are to be recovered. There is no specific provision either to in the Central Excise Act or the Customs Act, claiming “first charge” as prescribed in other enactments, which we have pointed out in earlier paragraphs.
Para No. 26 In the light of the above discussion, we conclude, (i) Generally, the dues to Government, i.e. tax, duties, etc., (Crown’s debts) get priority over ordinary debts.
(ii) Only when there is specific provision in the statue claiming “first charge” over the property, the Crown’s debt is entitled to have priority over the claim of others.
(iii) Since there is no specific provision claiming “first Charge” in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditors viz. the Petitioner Bank.
(iv) In the absence of much specific provision in the Central Excise Act as well as in Customs Act, we hold that the claim of secured creditor will prevail over Crown’s debts”.
(ii) Civil Appeal No. 2196 of 2012, Punjab National Bank Vs. Union of India and others.
The Hon’ble Apex Court reiterated aforesaid position against the Central Excise Department.
(iii) As per Section 142A of the Customs Act(came into force by Section 51 of the Finance Act, 2011) which runs as follows.
“Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person, under this Act, shall, save as otherwise provided in Section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 2002) be the first charge on the property of the assessee of the person, as the case may be.
The aforesaid provision is also incorporated in section 11(E) of Central Excise Act. Despite knowing the same, the 1st respondent had attached the mortgaged property belonging to the 2nd respondent.
iv) The Hon’ble Division Bench of this Hon’ble Court, in Writ Appeal No. 3249/2019 dated 27.6.2022 following the aforesaid decisions rendered by this Hon’ble Court and Apex Court directed the Customs Department to lift the attachment over the property in question within a period of two weeks from the date of judgement.”
12. The learned counsel for the petitioner drew the attention of this Court with reference to the sale certificate issued by the authorised officer which indicates the non-encumbrance, including the attachment made by the 1st respondent.
Reply by the 1st Respondent:
13. The 1st respondent has mainly contended that the writ petition is pre-mature. The written submissions made on behalf of the 1st respondent are as under:
“1. Writ Petition is Pre-mature
This Writ Petition is pre-mature, as there is nothing on record filed by the Petitioner to show that the Sale Certificate was sent to the 3rd Respondent viz., Sub- Registrar, Omalur. There is absolutely no averment in the Writ Affidavit to show that the Sale Certificate sought to be registered has been sent and refused and at the same time there is no document in typed set of documents filed by the Petitioner. Therefore, there is no cause of action for this Writ Petition and this Writ Petition is premature and abuse of process of Court.
2. Certiorari, not Mandamus
Though the Writ Petition has been filed for a Mandamus, in effect, it’s also a Certiorari, for the reason that the prayer prayed for is to remove the attachment of the 1st Respondent with the office of the 3rd respondent – the attachment of with the office of the 3rd Respondent is nothing but an entry in the encumbrance and removing that entry could only be done by quashing that particular entry. Therefore, this Writ Petition is quintessentially as “Certorified – Mandamus”.
3. Dispute between, only, the Petitioner and 1st Respondent/Central Govt.
Though there are Two other Respondents along with the 1st Respondent, the main lis to be decided is between the Petitioner and the 1st Respondent i.e., the Assistant Commissioner of Central Excise and Service Tax. All the averments in the Affidavit accompanying the Writ Petition alleges cause of action against the 1st Respondent only. Similarly, the Grounds raised in the Writ Affidavit are only against the 1st Respondent.
The 2nd Respondent is not a necessary party as the property belonging to them has already been sold by the Petitioner under SARFAESI Act. There are no averment or grounds raised against the 2nd Respondent.
The 3rd Respondent is only a formal party and there is no real lis/ dispute between the Petitioner and the 3rd Respondent. There are no averment or grounds raised against the 3rd Respondent.
4. Wrong fora
Since the main lis in this Writ Petition is between the Petitioner and the 1 Respondent, mandatory procedure has not been followed. The Petitioner is a Nationalised Bank and owned by the Government of India and the 1st Respondent is a Department of the Central Government. Whenever Two departments of the Central Government or through its instrumentalities require to resolve a dispute, then the matter must be referred to AMRD. Office Memorandum bearing No. 334774/DOLA/AMRD/2019 dated 31.03.2020 issued by the Department of Legal Affairs. Ministry of Law and Justice, Government of India, talks about Settlement of disputes other than taxation between Government Ministries / Departments inter se and between Government Ministries / Departments and other Ministries / Departments / Organisation(s) Administrative Mechanism for Resolution of Disputes (AMRD). I state that the 1st Respondent though is Taxing Department, the dispute between the Petitioner and the 1st Respondent is not a taxing dispute, but a dispute concerning the Right to attach property. Therefore the supra mentioned Office Memoramdum squarely applies to the case in hand.
5. Auction Purchaser, not the Petitioner
The bank after issuance of Sale Certificate, becomes funtus officio. The property now vests in the hands of auction purchaser. If at all aggrieved, it is the auction purchaser who has to file a Writ Petition.
6. One Lot/ property ID, Two Sale Certificates
a) Attention is invited to the E-Auction Sale Notice dated 09.03.2022. In that document, under Schedule – 1, there are Two different LOTS viz., LOTI and LOT II.
b) The Property ID for LOTI is IOBA15510003 and the reserve price is Rs.92,15,08,000/-.
c) The Property ID for LOT II is IOBA15510005 and the reserve price is Rs. 62,70,11,000/-.
d) LOTI, there are Three items viz.,
