Tahsildar (Rr) Vs Nizamudeen (Kerala High Court)
Kerala High Court held that statutory charge created against dealers as per the provisions of KGST Act, 1963 and KVAT Act, 2003, prior to any mortgage made, against the dealer would remain intact, even if the property is sold by the Bank.
Facts- 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.
Conclusion- It is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, 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 that Code, it cannot be said that merely because a priority in payment is available to the financial institutions, the statutory charge created under various enactments vanishes.
Held that writ appeals are allowed. Therefore we hold that the statutory charge created against the dealers as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003, prior to any mortgage made, against the dealer would remain intact, even if the property is sold by the Bank, by the rights conferred under Section 26E of the SARFAESI Act, 2002, and Section 31B of the RDB Act 1993 read with the Rules to it, till such time the encumbrances are cleared as per the provisions of the said enactments and the rules thereto.
Which thus means, if the mortgage is created after the amounts have fallen due as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003 and accordingly, proceedings are initiated, such a mortgage can only be termed as subject to a statutory charge as per Sections 26B and 38 of Act 1963 and the Act 2003 respectively.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
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 Ltd., 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 Ltd., Sri. Sergi Joseph Thomas, learned counsel for M/s Arams Tourism Private Ltd., 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 effect from 01.09.2016. The said provision specifies that 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.
7. Section 26B deals with registration by secured creditors and other creditors. Sub-section (1) thereto states that the Central Government may by notification, extent the provisions of Chapter IV A relating to Central Registry to all creditors other than secured creditors as defined in clause (zd) of sub-section (1) of Section 2, for creation, modification or satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by the such creditor to the borrower.
8. Sub-section (2) thereto states that from the date of notification under sub-section (1), any creditor including the secured creditor may file particulars of transactions of creation, modification or satisfaction of any security interest with the Central Registry in such form and manner as may be prescribed.
9. Sub-section (3) stipulates that a creditor other than the secured creditor filing particulars of transactions of creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under the Act.
10. Sub-section (5) specifies that if any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner on payment of such fee as may be prescribed.
11. Section 26C deals with effect of the registration of transactions and sub-section (1) states that without prejudice to the provisions contained in any other law, for the time being in force, any registration of transactions of creation, modification or satisfaction of security interest by a secured creditor or other creditor or filing of attachment orders under Chapter IV-A shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry for creation, modification or satisfaction of such security interest or attachment order, as the case may be.
12. Sub-section (2) thereto states that where security interest of attachment order upon any property in favour of the secured creditor or any other creditor are filed for the purpose of registration under the provisions of Chapter IV and Chapter IV-A, the claim of such secured creditor or other creditor holding attachment order shall have priority over any security interest created upon such property and any transfer by way of sale, lease or assignment or license of such property or attachment order subsequent to such registration, shall be subject to such claim.
13. Section 31B of the RDB Act, 1993 which deals with priority to secured creditors states that 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.
14. Therefore, on an analysis of the aforesaid provisions, it can be seen that there are certain modalities prescribed for registration of other attachments etc taken against the properties mortgaged by the loanees before the financial institutions. However, Section 26E only specifies that the 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.
15. Rule 8 of the Security Interest (Enforcement) Rules, 2002 (Rules 2002) deals with sale of immovable secured assets. Sub-section (1) thereto states that where the secured asset is an immovable property, the authorized officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to the Rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property.
16. Sub-rule (5) of the aforesaid Rule specifies that before effecting sale of the immovable property referred to in sub-rule (1) of Rule 9, the authorized officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of a such immovable secured asset by the method prescribed as follows:- (a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or (b) by inviting tenders from the public; (c) by holding public auction including through e-auction mode, or (d) by private treaty.
17. Sub-rule (6) of Rule 8 states that the authorized officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule (5). However the proviso thereto states that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding a public auction, the secured creditor shall cause a public notice in the form given in Appendix IV-A to be published in two leading newspapers including one in vernacular language having wide circulation in the locality.
18. That apart, sub-rule (7) thereto clarifies that every notice of sale shall be affixed on the conspicuous part of the immovable property and the authorized officer shall upload the detailed terms and conditions of the sale, on the website of the secured creditor, which shall include (a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor; (b) the secured debt for recovery of which the property is to be sold; (c) reserve price of the immovable secured assets below which the property may not be sold; (d) time and place of the public auction or the time after which sale by any other mode shall be completed; (e) deposit of earnest money as may be stipulated by the secured creditor; and (f) any other terms and conditions, which the authorized officer considers it necessary for a purchaser to know the nature and value of the property.
19. Rule 9 (1) stipulates that no sale of immovable property under the Rules 2002, in first instance shall take place before the expiry of 30 days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of Rule 8 or notice of sale has been served to the borrower.
20. Sub-rule (2) of Rule 9 states that the sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorized officer and shall be subject to confirmation by the secured creditor. Other rules are provided thereto to deal with the payment to be effected by the purchaser.
21. Sub-rule (6) of Rule 9 dealing with confirmation of sale states that ‘on confirmation of sale by the secured creditor and if the terms of the payment have been complied with, the authorized officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the form given in Appendix V to the Rules.
22. Sub-rule (7) of Rule 9 specifies that where the immovable property sold is subject to any encumbrances, the authorized officer may, if he thinks fit, allow the purchaser to deposit the money required to discharge the encumbrances and if any interest due thereon, together with any additional amount that my be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him.
23. The proviso to Rule 9(7) is of utmost importance which states that if after meeting the cost of removing encumbrances and contingencies there is any surplus available out of the money deposited by the purchaser such surplus shall be paid to the purchaser within fifteen days from the date of finalization of the same.
24. Again Rule 9(8) very pertinently clarifies that on such deposit of money for discharge of the encumbrances, the authorized officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited within and take steps to make the payment accordingly.
25. Rule 9(9) stipulates that the authorized officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7).
26. It is significant to note that Rule 9(10) explicitly states that the certificate of sale issued under sub-rule (6) shall specifically mention whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.
27. Therefore the contention advanced by the State Government is that reading the provisions of Section 26E and Rules 8 and 9 of the act and rules 2002 in juxtaposition, it is explicit that there is a clear-cut procedure prescribed under the Rules to enforce the security interest and to remove the encumbrances in the property. Therefore, it is the contention of the State Government that without satisfying the requirements of Rules 8 and 9 of the Rules 2002, the first charge created as per the provisions of the KSGT Act, 1963 and the KVAT Act, 2003 would continue to run with the property.
28. Per contra, the contention advanced by the financial institutions is that the Rules discussed above are in violation of Section 26E since Section 26E creates a priority to the secured creditors. However, in respect of the same, the State Government contents that there is only priority to the secured creditors for payment of the debts due over all other debts, revenues, taxes etc., and therefore, merely because the financial institutions have exercised their priority even by sale of the property, the first charge created in favour of the Government as per the statutes said above would not be eliminated.
29. In order to proceed further, we are of the view that the concerned provisions of the KGST Act, 1963 and the KVAT Act, 2003 are to be discussed.
30. Section 26B of KGST Act, 1963 enumerates that tax payable under the said Act to be first charge on the property. The said provision reads that notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under the Act shall be the first charge on the property of the dealer or such person.
31. Likewise, Section 38 of the KVAT Act, 2003 dealing with the tax payable to be first charge on the property, states that notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under the Act shall be the first charge on the property of the dealer, or such person.
32. Section 27 of KVAT Act, 2003 dealing with certain transfer to be void stipulates that where during the pendency of any proceedings under the Act or after the completion thereof any assessee creates a charge on or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of any of his assets in favour of any person such charge or transfer shall be void as against any claim in respect of any tax or other sum payable by the assessee under the Act.
33. Therefore the contention advanced by the State Government is that even going by the provisions of the SARFAESI Act, 2002 and the RDB Act 1993 discussed above, they are not creating any charge on the properties mortgaged with the financial institutions, especially when the phraseology employed in Section 26E is only for priority of payment of the debts due. It is also the contention of the State Government that Rules 8 and 9 discussed above would give a clear picture as to the manner in which the sale notices are to be published by the Bank and the manner in which the encumbrances are to be removed.
34. It is also submitted by the State Government that as per Section 31 of the KVAT Act, 2003 dealing with payment and recovery of tax that every dealer liable to pay tax under this Act for any return period shall pay tax within such period as may be prescribed and on failure of the dealer from whom any tax or other amount is demanded to pay within fifteen days from the date of service of notice, the whole of the amount outstanding on the date of default shall become immediately due and shall be a charge on the properties on the person or persons liable to pay the tax or other amount under the Act.
35. Sub-section (4) of Section 31 further stipulates that any tax or any other amount due under the Act from a dealer or any other person may, without prejudice to any other mode of recovery, be recovered; a) as if it were an arrear of land revenue; (b) on application to any magistrate, by such magistrate, if it were a fine imposed by him.
36. Therefore according to the State Government, purchase of an immovable property made by any person in a sale conducted by a financial institution as per the provisions of SARFAESI Act, 2002 and the RDB Act, 1993 are liable to pay the amounts due in order to secure a sale certificate free of encumbrances.
37. In order to understand the true implication of a sale notice issued under Rule 8 of the Rules 2002, Appendix IV-A constituted as per Rule 8(6) is extracted hereunder:-
“APPENDIX IV-A
[See proviso to rule 8(6)]
SALE NOTICE FOR SALE OF IMMOVABLE PROPERTIES
E-Auction sale Notice for Sale of Immovable Assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 read with proviso to rule 8(6) of the Security Interest (Enforcement) Rules, 2002.
Notice is hereby given to the public in general and in particular to the Borrower(s) and Guarantor(s) that the below described immovable property mortgaged/charged to the Secured Creditor, the constructive/physical ………………….. (whichever is applicable) possession of which has been taken by the Authorised Officer of …….. . Secured Creditor, will be sold on “As is where is”, “As is what is” and “Whatever there is” on ……… . (mention date of the sale), for recovery of Rs………….. due to the Secured Creditor from……… (mention name of the Borrower(s) and…….. (mention name of the Guarantor(s). The reserve price will be Rs………. and the earnest money deposit will be Rs……….. (Give short description of the immovable property with known encumbrances, if any) For detailed terms and conditions of the sale, please refer to the link provided in …………………………………………………….. Secured Creditor’s website, i.e., www.(give details of website).
Date:
