Central Bank of India
Vs. State of Kerala & Ors. [2009] INSC 435 (27 February 2009)
Judgment
CIVIL APPELLATE
JURISDICTION CIVIL APPEAL NO.95 OF 2005 Central Bank of India ... Appellant
Versus State of Kerala and others ... Respondents WITH C.A. No.2811 of 2006,
C.A. No.3549 of 2006, C.A. No.3973 of 2006, C.A. No.4174 of 2006, C.A. No.4909
of 2006, C.A. No.1288/2007 and C.A. No.1318_of 2009 [arising out of S.L.P.(C )
No. 24767 of 2005]
G.S. Singhvi, J.
1.
Leave
granted in S.L.P. (C) No.24767 of 2005.
2.
Whether
Section 38C of the Bombay Sales Tax Act, 1959 [for short "the Bombay
Act"] and Section 26B of the Kerala General Sales Tax Act, 1963 [for short
"the Kerala Act"] and similar provision contained in other State
legislations by which first charge has been created on the property of the
dealer or such other person, who is liable to pay sales tax etc., are
inconsistent with the provisions contained in the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (for short `the DRT Act') for
recovery of `debt' and the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (for short `the
Securitisation Act') for enforcement of `security interest' and whether by
virtue of non obstante clauses contained in Section 34(1) of the DRT Act and
Section 35 of the Securitisation Act, two Central legislations will have
primacy over State legislations are the questions which arise for determination
in these appeals.
3.
For
the sake of convenience, we have taken notice of the facts of Civil Appeal
Nos.95/2005 and 2811/2006 and the reasons contained in the orders passed by
Kerala and Bombay High Courts, which are under challenge in these appeals.
4.
C.A.
No.95/2005 - Central Bank of India vs. State of Kerala & others - Central
Bank of India, which is a nationalized bank, gave cash/ credit facility to the
tune of Rs.12 lakhs to Kerala Refineries (P) Ltd. The borrower executed
mortgage of movable and immovable properties for securing repayment. As the
borrower failed to repay the dues, the bank filed civil suit bearing O.S.
No.234/1996 in the Court of Sub-Judge at Mavelikara. Later on the suit was
transferred to Ernakulam Bench of the Debts Recovery Tribunal (hereinafter
referred to as "the Tribunal"). By an order dated 1.12.2000, the
Tribunal decreed the suit for an amount of Rs.55 lakhs with future interest. As
a sequel to this, Recovery Certificate dated 1.11.2001 was issued in favour of
the bank and the Recovery Officer issued notice for sale of the movable and
immovable properties of the borrower. At that stage, Tehsildar, Mavelikara
issued notice dated 26.11.2001 to the borrower for recovery of Rs.40,38,481/-
as arrears of sales tax stating therein that its moveable and immovable
properties had been attached on 2.2.2000 and 4.9.2000 and that steps are being
taken to sell the attached property by public auction. The Tehsildar claimed
that by virtue of Section 26B of the Kerala Act, as amended by Act No.23/1999,
the State Government has got first charge over the attached properties. The
bank challenged the notice of the Tehsildar by filing a petition under Article
226 of the Constitution of India, which was registered as O.P. No.7835/2002(G).
The bank relied on the decisions of this Court in A.P. State Financial
Corporation v. Official Liquidator [(2000) 7 SCC 291] and Allahabad Bank v.
Canara Bank and another [(2000) 4 SCC 406], and pleaded that being a Central
legislation, the DRT Act would prevail over the Kerala Act by which first
charge was created in favour of the State. The learned Single Judge of the
Kerala High Court negatived the bank's challenge by observing that proceedings
under the Kerala Act had been initiated before the issue of certificate by the
Tribunal and that even if the Tribunal has got exclusive jurisdiction to
recover the amount due to the bank, the Tehsildar was not obliged to approach
it for recovery of the State dues. The learned Single Judge referred to Section
46 of the Kerala Revenue Recovery Act, 1968, which provides that within 14 days
from the date of attachment of any immovable property any person other than the
defaulter can lodge objection to the attachment of the whole or any portion of
such property on the ground that such property was not liable for the arrears
of public revenue, and held that as the bank had claimed first charge or prior
charge over the attached property, it can file appropriate objections under
Section 46 of the Kerala Revenue Recovery Act, 1968 and make a prayer that
public revenue can be recovered after paying its dues. The learned Single Judge
further observed that in terms of Section 47 of the Kerala Revenue Recovery
Act, 1968 the petitioner can obtain release of the attached property by paying
arrears of the public revenue. The appeal preferred against the order of the
learned Single Judge was dismissed by the Division Bench which held that the
bank can avail remedy by filing objections under Sections 46 to 48 of the
Kerala Revenue Recovery Act, 1968.
5.
C.A.
No.2811/2006 - The Thane Janata Sahakari Bank Ltd. vs. The Commissioner of
Sales Tax & others - Appellant - Thane Janata Sahakari Bank Ltd., which is
a scheduled cooperative society incorporated under the Maharashtra Cooperative
Society Act, 1960 granted credit facilities to M/s. Charishma Cosmetics Pvt.
Ltd. Co. (for short `the Company'). As on 30.6.2004, the company had availed
credit facility to the tune of Rs.2,32,00,000/- by creating equitable mortgage
of its factory, land and building in favour of the bank. Due to the company's
failure to repay the amount, its account was classified as non-performing asset
and the bank initiated proceedings under the Securitisation Act by issuing
notice under Section 13 (2). The possession of movable and immovable properties
of the company is said to have been taken by the bank on 15.2.2005 and the same
were sold for a sum of Rs.66,31,001/-. On 11.7.2005, Assistant Commissioner of
Sales Tax informed the bank that sales tax dues amounting to Rs.3,62,82,768/-
constitute first charge against the company and, therefore, it could not have
taken possession of the mortgaged assets and sold the same. After some
correspondence, the Assistant Commissioner issued notice dated 16.8.2005 to the
bank to show cause as to why action may not be taken against it under Section
39 of the Bombay Sales Tax Act, 1959 (for short "the Bombay Act") for
recovery of Rs.49,68,614/- in addition to the auction proceeds. The bank
unsuccessfully contested the notice and then filed writ petition for quashing
the same. It was urged on behalf of the bank that in view of the conflict
between Section 38C of the Bombay Act and Section 35 of the Securitisation Act,
the latter being a Central legislation, the first charge created by the State
Act cannot have priority over debts of the bank because while enacting the
Securitisation Act the Parliament will be deemed to be aware of the provisions
of the State legislation. It was also contended that under Section 169 of
Maharashtra Land Revenue Code, 1966, the State Government can claim priority
over unsecured dues, but being secured creditor, the bank has first and
exclusive charge over the properties of the company and has priority over the
sales tax dues of the State. The Division Bench of the High Court analysed the
provisions of the Securitisation Act, the State Act and observed:-
"......... if any Central Act provides for first charge, the charge
created under Section 38C of Bombay Sales Tax Act is overridden. Conversely, if
the Central Act does not provide for first charge in respect of the liability
under the said Act, the first charge created under Section 38C of Bombay Sales
Tax Act shall hold the field."
The Division Bench
then noted that Section 13 of the Securitisation Act does not create first
charge in favour of the banks; that it merely provides the machinery for realization
by a secured creditor of the security interest without intervention of the
Court or Tribunal; that it overrides the provisions contained in Sections 69 or
69A of the Transfer of Property Act which empower the mortgagee to sell or
concur in selling the mortgaged property or any part thereof in default of
payment of the mortgage money without intervention of the Court in the
circumstances referred to in Section 69 and for payment of Court Receiver as
provided in Section 69A and held:
"The Bombay
Sales Tax Act and the Securitisation Act have been enacted by the competent
legislatures for different purposes and operate in different fields. The Bombay
Sales Tax Act is enacted by the State Legislature under Entry 54 of List II in
the Seventh Schedule for levy of tax on the sale or purchase of certain goods
in the State of Bombay (now State of Maharashtra). On the other hand, the
Securitisation Act has been enacted by the Parliament under Entry 54 of List I
for regulating the Securitisation and reconstruction of financial assets and
for enforcement of security interest. There is neither any conflict in these
two Acts nor Section 38 C of the Bombay Sales Tax Act can be said to be
inconsistent with Section 35 of the Securitisation Act. The area of operation
is entirely different and there is no overlapping anywhere.
Section 35 of the
Securitisation Act may have had some bearing, if there was some provision in
the Securitisation Act for first charge in favour of the banks and financial
institutions. But neither Section 13 nor any other provision under the
Securitisation Act makes a provision for first charge. There being no provision
in the Securitisation Act providing for first charge in favour of the banks
section 35 of the Securitisation Act cannot be held to override section 38C of
the Bombay Sales Tax Act, 1959 that specifically provides that the liability
under the said Act shall be the first charge. The overriding provision
contained in Section 38C is only subject to the provision of the first charge
in the Central Act holding the field. The case of the Bank is not covered by
the expression, "subject to any provision regarding first charge in any
Central Act for the time being in force" and that being the position,
Section 38C is not overridden by section 35 of the Securitisation Act."
6.
S/Shri
Shekhar Naphde, Dushyant Dave, Bishwajeet Bhattacharya, T.L.V. Iyer and Ms.
Indu Malhotra, learned senior counsel appearing for the appellants argued that
as the DRT Act and Securitisation Act have been enacted by the Parliament under
Article 246(1) read with Entry 45 in List I in the Seventh Schedule of the
Constitution for speedy recovery of debts due to banks or financial
institutions or for enforcement of security interest by the secured creditors
and overriding effect has been given to these legislations vis-a-vis other
laws, the provisions contained therein will have primacy over State
legislations which have been enacted under Article 246(2) read with Entry 54 in
List II in the Seventh Schedule and under which first charge has been created
in favour of the State in respect of the dues of sales tax etc. Shri Dushyant
Dave relied upon the judgments in State of West Bengal v. Kesoram Industries
Ltd. and others [(2004) 10 SCC 201] and Govt. of A.P. and anr. v. J.B.
Educational Society and anr. [(2005) 3 SCC 212], and argued that even though
the Central and State legislations have not been enacted with reference to a
particular entry in List III in the Seventh Schedule, Article 254 will get
attracted, and the Kerala and Bombay High Courts committed an error by refusing
to accept the submission that banks, financial institutions and secured
creditors have priority in the matter of recovery of debts or enforcement of
security interest vis-`-vis the State's right to recover the dues of sales tax
etc. Shri Bishwajeet Bhattacharya submitted that in view of Article 254(1) of
the Constitution, provisions contained in State laws which are repugnant to or
inconsistent with Central legislations, are liable to be ignored. All the
learned counsel laid considerable emphasis on the non obstante clauses
contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation
Act, and argued that even though the language of Section 38C of the Bombay Act
and Section 26B of the Kerala Act suggests that State legislations have been
given overriding effect vis a vis other laws, the courts are duty bound to give
full effect to the primacy of Central legislations over State legislations.
Shri Shekhar Naphde and other learned counsel heavily relied on Section 13(1),
(7) and (9) of the Securitisation Act and argued that when Parliament has
designedly given priority to the right of banks etc. to recover their dues or
enforce security interest, first charge created under the State legislation
must be treated sub-servient to such right. Learned senior counsel made a
pointed reference to the provisos incorporated in Section 13(9) for giving
priority to the dues of the workers of the company in liquidation and argued
that in the absence of similar provision in relation to sales tax dues etc.
payable to the State, priority given to the dues of banks etc. cannot be
diluted or stultified by giving over stretched interpretation to the provisions
contained in the State legislations relating to first charge.
7.
Shri
Rakesh Dwivedi and Shri S.K. Dholakia, learned senior counsel appearing for the
States of Kerala and Maharashtra respectively argued that even though the DRT
Act and Securitisation Act contain non obstante clauses suggesting that the
provisions contained therein would prevail over other laws, the same must be
interpreted keeping in view the legislative policy underlying those enactments
and if they are so interpreted, Section 38C of the Bombay Act and Section 26B
of the Kerala Act and similar provisions contained in other State legislations
by which first charge has been created on the property of the dealer or any
other person liable to pay sales tax etc. cannot be treated inconsistent with
Central legislations. Shri Dwivedi submitted that the DRT Act and
Securitisation Act have been enacted to speed up the recovery of the dues of
banks, financial institutions and secured creditors but there is no provision
in the two enactments by which first charge has been created in favour of
banks, etc. and, therefore, the provisions contained in State legislations
creating first charge in respect of the dues of sales tax etc. cannot be
treated as inconsistent with Central legislations. Shri Dwivedi further
submitted that levy and collection of tax etc. is sovereign function as well as
necessity of the State and as such the State has exclusive plenary power to
legislate on that subject and in the absence of any provision in the DRT Act or
Securitisation Act creating first charge in favour of the banks etc., in lieu
of their dues, these legislations cannot be given overriding effect qua the
provisions contained in the State legislations and right of the State to
recover the dues of sales tax etc. cannot be frustrated merely because a bank
or financial institution or secured creditor has initiated action for recovery
of debt etc. by filing application under Section 19 of the DRT Act or by
resorting to the procedure contained in Section 13 of the Securitisation Act.
In support of this argument, learned senior counsel invoked the doctrine of sub
silentio.
8.
We
have considered the respective arguments/submissions. Article 245 of the
Constitution is the source of legislative power of Parliament and State
legislatures. It provides that subject to the provisions of the Constitution,
Parliament may make laws for the whole or any part of the territory of India,
and the legislature of a State may make laws for the whole or any part of the
State. The legislative field of the Parliament and State legislatures has been
specified in Article 246. In terms of Clause (1) of Article 246, Parliament has
exclusive power to make laws with respect to any of the matters enumerated in
List I in the Seventh Schedule. Under Clause (2) the Parliament and subject to
Clause (1), the legislature of any State also have power to make laws with
respect to any of the matters enumerated in List III in the Seventh Schedule.
Subject to Clauses (1) and (2), the legislature of State has exclusive power to
make laws for such State or any part thereof with respect to any of the matters
enumerated in List II in the Seventh Schedule. It is thus evident that
Parliament has exclusive power to legislate with respect to any of the matters
enumerated in List I and State legislatures enjoys similar power with respect
to any of the matters enumerated in List II. The combined effect of the
different clauses of Article 246 is that in respect of any matter falling
within List I, Parliament has exclusive power of legislation, whereas the State
legislature has exclusive power to make laws for such State or any part thereof
with respect to any of the matters enumerated in List II in the Seventh
Schedule and with respect to the matters enumerated in List III, both the
Parliament and State legislature have power to make laws. Article 254 which contains
mechanism for resolution of conflict between Central and State legislations
enacted with respect to any matter enumerated in List III of the Seventh
Schedule reads as under:
"254. Inconsistency
between laws made by Parliament and laws made by the Legislatures of States.--
(1) If any provision of a law made by the Legislature of a State is repugnant
to any provision of a law made by Parliament which Parliament is competent to
enact, or to any provision of an existing law with respect to one of the
matters enumerated in the Concurrent List, then, subject to the provisions of
clause (2), the law made by Parliament, whether passed before or after the law
made by the Legislature of such State, or, as the case may be, the existing
law, shall prevail and the law made by the Legislature of the State shall, to
the extent of the repugnancy, be void.
(2) Where a law made
by the Legislature of a State with respect to one of the matters enumerated in
the Concurrent List contains any provision repugnant to the provisions of an
earlier law made by Parliament or an existing law with respect to that matter,
then, the law so made by the Legislature of such State shall, if it has been
reserved for the consideration of the President and has received his assent,
prevail in that State:
Provided that nothing
in this clause shall prevent Parliament from enacting at any time any law with
respect to the same matter including a law adding to, amending, varying or repealing
the law so made by the Legislature of the State."
9.
Article
254 was interpreted by the Constitution Bench in Zaverbhai Amaidas v. State of
Bombay [(1955) SCR 799] in the context of challenge to Bombay Act No. 36/1947
on the ground that the same is repugnant to Section 7(1) of the Essential
Supplies (Temporary Powers) Act, 1946. The Constitution Bench referred to the
judgment in The Attorney General of Ontario v. The Attorney General for the
Dominion [1896 A.C. 348] and held "now by the proviso to Article 254(2)
the Constitution has enlarged the powers of Parliament, and under that proviso,
Parliament can do what the Central legislature could not under Section 107(2)
of the Government of India Act and enact a law adding to, amending, varying, repealing
a law of the State, when it relates to a matter mentioned in the Concurrent
List. The proposition then is that under the Constitution Parliament can,
acting under the proviso to Article 254(2), repeal a State law. But when it
does not expressly do so, even then the State law will be void under that
provision if it conflicts with a later "law" with respect to the same
matter", that may be enacted by Parliament. In A.S. Krishna v. State of
Madras [(1957) SCR 399] the Constitution Bench considered challenge to validity
of Madras Prohibition Act, 1937 on the ground that the same is repugnant to the
Indian Evidence Act, 1872 and the Code of Criminal Procedure, 1898 which were
enacted by the Parliament. The Constitution Bench repelled the challenge and
held:
"The position,
then, might thus be summed up: When a law is impugned on the ground that it is
ultra vires the powers of the legislature which enacted it, what has to be
ascertained is the true character of the legislation. To do that, one must have
regard to the enactment as a whole, to its objects and to the scope and effect
of its provisions. If on such examination it is found that the legislation is
in substance one on a matter assigned to the legislature, then it must be held
to be valid in its entirety, even though it might incidentally trench on
matters which are beyond its competence. It would be quite an erroneous
approach to the question to view such a statute not as an organic whole, but as
a mere collection of sections, then disintegrate it into parts, examine under
what heads of legislation those parts would severally fall, and by that process
determine what portions thereof are intra vires, and what are not. Now, the
Madras Prohibition Act is, as already stated, both in form and in substance, a
law relating to intoxicating liquors. The presumptions in Section 4(2) are not
presumptions which are to be raised in the trial of all criminal cases, as are
those enacted in the Evidence Act. They are to be raised only in the trial of
offences under Section 4(1) of the Act.
They are therefore
purely ancillary to the exercise of the legislative power in respect of Entry
31 in List II. So also, the provisions relating to search, seizure and arrest
in Sections 28 to 32 are only with reference to offences committed or suspected
to have been committed under the Act. They have no operation generally or to
offences which fall outside the Act. Neither the presumptions in Section 4(2)
nor the provisions contained in Sections 28 to 32 have any operation apart from
offences created by the Act, and must, in our opinion, be held to be wholly
ancillary to the legislation under Entry 31 in List II. The Madras Prohibition
Act is thus in its entirety a law within the exclusive competence of the
Provincial Legislature, and the question of repugnancy under Section 107(1)
does not arise."
10.
In
M/s. Hoechst Pharmaceuticals Ltd. and others v. State of Bihar and others
[(1983) 4 SCC 45], this Court considered the question whether there is any
conflict between Drugs (Price Control) Order, 1979 made under Section 3 of the which
is a Central legislation and Section 5(3) of the Bihar Finance Act, 1981 by
which Essential Commodities Act, 1955 surcharge was levied on certain dealers
engaged in selling drugs. While negating challenge to the State legislation, a
three-Judge Bench laid down the following principles:
(1) The various
entries in the three lists are not "powers" of legislation but
"fields" of legislation. The Constitution effects a complete
separation of the taxing power of the Union and of the States under Article
246. There is no overlapping anywhere in the taxing power and the Constitution
gives independent sources of taxation to the Union and the States.
(2) In spite of the
fields of legislation having been demarcated, the question of repugnancy
between law made by Parliament and a law made by the State Legislature may
arise only in cases when both the legislations occupy the same field with
respect to one of the matters enumerated in the Concurrent List and a direct
conflict is seen. If there is a repugnancy due to overlapping found between
List II on the one hand and List I and List III on the other, the State law
will be ultra vires and shall have to give way to the Union law.
(3) Taxation is
considered to be a distinct matter for purposes of legislative competence.
There is a distinction made between general subjects of legislation and
taxation. The general subjects of legislation are dealt with in one group of
entries and power of taxation in a separate group. The power to tax cannot be
deduced from a general legislative entry as an ancillary power.
(4) The entries in
the lists being merely topics or fields of legislation, they must receive a
liberal construction inspired by a broad and generous spirit and not in a
narrow pedantic sense. The words and expressions employed in drafting the
entries must be given the widest-possible interpretation. This is because, to
quote V. Ramaswami, J., the allocation of the subjects to the lists is not by
way of scientific or logical definition but by way of a mere simplex numeration
of broad categories. A power to legislate as to the principal matter
specifically mentioned in the entry shall also include within its expanse the
legislations touching incidental and ancillary matters.
(5) Where the
legislative competence of the legislature of any State is questioned on the
ground that it encroaches upon the legislative competence of Parliament to
enact a law, the question one has to ask is whether the legislation relates to
any of the entries in List I or III. If it does, no further question need be
asked and Parliament's legislative competence must be upheld. Where there are
three lists containing a large number of entries, there is bound to be some
overlapping among them. In such a situation the doctrine of pith and substance
has to be applied to determine as to which entry does a given piece of
legislation relate. Once it is so determined, any incidental trenching on the
field reserved to the other legislature is of no consequence. The court has to
look at the substance of the matter. The doctrine of pith and substance is
sometimes expressed in terms of ascertaining the true character of legislation.
The name given by the legislature to the legislation is immaterial. Regard must
be had to the enactment as a whole, to its main objects and to the scope and
effect of its provisions.
Incidental and
superficial encroachments are to be disregarded.
(6) The doctrine of
occupied field applies only when there is a clash between the Union and the
State Lists within an area common to both. There the doctrine of pith and
substance is to be applied and if the impugned legislation substantially falls
within the power expressly conferred upon the legislature which enacted it, an
incidental encroaching in the field assigned to another legislature is to be
ignored. While reading the three lists, List I has priority over Lists III and
II and List III has priority over List II.
However, still, the
predominance of the Union List would not prevent the State Legislature from
dealing with any matter within List II though it may incidentally affect any
item in List I.
[Emphasis supplied]
11.
The
three-Judge Bench also dealt with the scope of Article 254 and held:
"Article 254 of
the Constitution makes provision first, as to what would happen in the case of
conflict between a Central and State law with regard to the subjects enumerated
in the Concurrent List, and secondly, for resolving such conflict. Article 254(1)
enunciates the normal rule that in the event of a conflict between a Union and
a State law in the concurrent field, the former prevails over the latter.
Clause (1) lays down that if a State law relating to a concurrent subject is
`repugnant' to a Union law relating to that subject, then, whether the Union
law is prior or later in time, the Union law will prevail and the State law
shall, to the extent of such repugnancy, be void. To the general rule laid down
in clause (1), clause (2) engrafts an exception viz. that if the President
assents to a State law which has been reserved for his consideration, it will
prevail notwithstanding its repugnancy to an earlier law of the Union, both
laws dealing with a concurrent subject. In such a case, the Central Act, will
give way to the State Act only to the extent of inconsistency between the two,
and no more. In short, the result of obtaining the assent of the President to a
State Act which is inconsistent with a previous Union law relating to a
concurrent subject would be that the State Act will prevail in that State and
override the provisions of the Central Act in their applicability to that State
only. The predominance of the State law may however be taken away if Parliament
legislates under the proviso to clause (2). The proviso to Article 254(2)
empowers the Union Parliament to repeal or amend a repugnant State law, either
directly, or by itself enacting a law repugnant to the State law with respect
to the `same matter'. Even though the subsequent law made by Parliament does
not expressly repeal a State law, even then, the State law will become void as
soon as the subsequent law of Parliament creating repugnancy is made. A State
law would be repugnant to the Union law when there is direct conflict between
the two laws. Such repugnancy may also arise where both laws operate in the
same field and the two cannot possibly stand together."
12.
In
State of West Bengal v. Kesoram Industries Ltd. (supra), the majority of the
Constitution Bench recognized the possibility of overlapping of legislations
enacted under different entries in Lists I and II in the Seventh Schedule and
observed:
"While reading
the three lists, List I has priority over Lists III and II and List III has
priority over List II. However, still, the predominance of the Union List would
not prevent the State Legislature from dealing with any matter within List II
though it may incidentally affect any item in List I.
In spite of the
fields of legislation having been demarcated, the question of repugnancy
between law made by Parliament and a law made by the State Legislature may
arise only in cases when both the legislations occupy the same field with
respect to one of the matters enumerated in List III and a direct conflict is
seen. If there is a repugnancy due to overlapping found between List II on the
one hand and List I and List III on the other, the State law will be ultra
vires and shall have to give way to the Union law.
.... If there is
conflict, the correct approach is to find an answer to three questions step by
step as under:
One--Is it still
possible to effect reconciliation between two entries so as to avoid conflict
and overlapping? Two--In which entry the impugned legislation falls, by finding
out the pith and substance of the legislation. In this regard the court has to
look at the substance of the matter. The doctrine of pith and substance is
sometimes expressed in terms of ascertaining the true character of legislation.
The name given by the legislature to the legislation is immaterial. Regard
must be had to the enactment as a whole, to its main objects and to the scope
and effect of its provisions. Incidental and superficial encroachments are to
be disregarded. Interpretation is the exclusive privilege of the Constitutional
Courts and the court embarking upon the task of interpretation would place such
meaning on the words as would effectuate the purpose of legislation avoiding
absurdity, unreasonableness, incongruity and conflict. As is with the words
used so is with the language employed in drafting a piece of legislation. That
interpretation would be preferred which would avoid conflict between two fields
of legislation and would rather import homogeneity. It follows as a corollary
of the abovesaid statement that while interpreting tax laws the courts would be
guided by the gist of the legislation instead of by the apparent meaning of the
words used and the language employed. The courts shall have regard to the
object and the scheme of the tax law under consideration and the purpose for
which the cess is levied, collected and intended to be used. The courts shall
make endeavour to search where the impact of the cess falls. The subject-matter
of levy is not to be confused with the method and manner of assessment or
realization. and Three - Having determined the field of legislation where in
the impugned legislation falls by applying the doctrine of pith and substance,
can an incidental trenching upon another field of legislation be ignored? Once
it is so determined if the impugned legislation substantially falls within the
power expressly conferred upon the legislature which enacted it, an incidental
encroaching in/trenching on the field assigned to another legislature is to be
ignored."
13.
In
Govt. of A.P. and anr. v. J.B. Educational Society and anr. (supra), the Court
was called upon to decide whether there was any conflict between the provisions
of All India Council for Technical Education Act, 1987 and the A.P. Education
Act, 1982 and whether the State legislation was liable to be declared void and
inoperative on the ground that the State legislature was not competent to enact
law in the field occupied by the Central legislation. A two-Judge Bench
analysed the provisions of the two enactments and held:
"Parliament has
exclusive power to legislate with respect to any of the matters enumerated in
List I, notwithstanding anything contained in clauses (2) and (3) of Article
246. The non obstante clause under Article 246(1) indicates the predominance or
supremacy of the law made by the Union Legislature in the event of an overlap
of the law made by Parliament with respect to a matter enumerated in List I
and a law made by the State Legislature with respect to a matter enumerated in
List II of the Seventh Schedule.
............................
With respect to
matters enumerated in List III (Concurrent List), both Parliament and the State
Legislature have equal competence to legislate. Here again, the courts are
charged with the duty of interpreting the enactments of Parliament and the State
Legislature in such manner as to avoid a conflict. If the conflict becomes
unavoidable, then Article 245 indicates the manner of resolution of such a
conflict.
Thus, the question of
repugnancy between the parliamentary legislation and the State legislation can
arise in two ways. First, where the legislations, though enacted with respect
to matters in their allotted sphere, overlap and conflict. Second, where the
two legislations are with respect to matters in the Concurrent List and there
is a conflict. In both the situations, parliamentary legislation will
predominate, in the first, by virtue of the non obstante clause in Article
246(1), in the second, by reason of Article 254(1). Clause (2) of Article 254
deals with a situation where the State legislation having been reserved and
having obtained President's assent, prevails in that State; this again is
subject to the proviso that Parliament can again bring a legislation to
override even such State legislation."
14.
The
ratio of the above noted judgments is that Article 254 gets attracted only when
both Central and State legislations have been enacted on any of the matters
enumerated in List III in Seventh Schedule and there is conflict between two
legislations. Though in State of West Bengal v. Kesoram Industries Ltd. (supra)
some observations appear to have been made suggesting that Article 254 gets
attracted even though legislations may have been enacted in different entries
in Lists I and II, but the same have to be read in consonance with the plain language
of the said Article and other judgments including the three-Judge Bench
judgment in M/s. Hoechst Pharmaceuticals Ltd. and others v. State of Bihar and
others (supra), which has been expressly approved by the Constitution Bench.
15.
Undisputedly,
the DRT Act and Securitisation Act have been enacted by Parliament under Entry
45 in List I in the Seventh Schedule whereas Bombay and Kerala Acts have been
enacted by the concerned State legislatures under Entry 54 in List II in the
Seventh Schedule. To put it differently, two sets of legislations have been
enacted with reference to entries in different lists in the Seventh Schedule.
Therefore, Article
254 cannot be invoked per se for striking down State legislations on the ground
that the same are in conflict with the Central legislations. That apart, as
will be seen hereafter, there is no ostensible overlapping between two sets of legislations.
Therefore, even if the observations contained in Kesoram Industries' case
(supra) are treated as law declared under Article 141 of the Constitution, the
State legislations cannot be struck down on the ground that the same are in
conflict with Central legislations.
16.
Before
proceeding further we may notice the background in which the DRT and
Securitisation Acts were enacted, and schemes of the two legislations. After
independence, the Government of India decided to give impetus to the industrial
development of the country. Central and State Governments encouraged banks and
other financial institutions to liberalize the grant of loans and other credit
facilities to the industrial entrepreneurs. With the nationalization of banks,
this policy got a boost and the country witnessed rapid industrialization. The
issue of repayment/recovery of loans etc. given by banks and financial
institutions did not pose any serious problem in first three decades. However,
with the passage of time, the human greed took over the righteousness and those
who were granted loans and/or other financial facilities did not bother to
repay. Not only this, the efforts made by banks and financial institutions for
recovery of their dues were stultified by the defaulting borrowers who indulged
in unwarranted and protracted litigation in civil courts. The slow and tardy
progress of cases instituted in civil courts resulted in blocking of several
thousand crores of public money, which was considered critical to the
successful implementation of fiscal reform. The pioneers of financial sector
reforms called for early solution of this problem. Therefore, the Government of
India constituted a committee under the Chairmanship of Shri T. Tiwari to
examine the legal and other difficulties faced by banks and financial
institutions in the recovery of their dues and suggest remedial measures. The
Tiwari Committee noted that the existing procedure for recovery was very
cumbersome and suggested that special tribunals be set up for recovery of the
dues of banks and financial institutions by following a summary procedure. The
Tiwari Committee also prepared a draft of the proposed legislation which
contained a provision for disposal of cases in three months and conferment of
power upon the recovery officer for expeditious execution of orders made by
adjudicating bodies. The issue was further examined by the Committee on the
Financial System headed by Shri M. Narasimham. In its first report, Narasimham
Committee also suggested setting up of special tribunals with special powers
for adjudication of cases involving the dues of banks and financial
institutions. Even in regard to priority among creditors, Narasimham Committee
made the following suggestion:
"The
Adjudication Officer will have such power to distribute the sale proceeds to
the banks and financial institutions being secured creditors, in accordance
with inter se agreement/arrangement between them and to the other persons
entitled thereto in accordance with the priorities in the law."
17.
After
considering the reports of two Committees and taking cognizance of the fact
that as on 30th September, 1990 more than 15 lakhs cases filed by public sector
banks and 304 cases filed by financial institutions were pending in various
courts for recovery of debts etc. amounting to Rs.6,000 crores, the Central
Government introduced "The Recovery of Debts Due to Banks and Financial
Institutions Bill, 1993" in Lok Sabha on 13.5.1993. It, however, appears
that before the Bill could be passed, Lok Sabha was adjourned. Therefore, the
President of India in exercise of the powers conferred by Article 123(1) of the
Constitution, promulgated "The Recovery of Debts Due to Banks and
Financial Institutions Ordinance, 1993", which was replaced by the DRT
Act. The new legislation facilitated creation of specialized forums, i.e., the
Debts Recovery Tribunals and Debts Recovery Appellate Tribunals for expeditious
adjudication of disputes relating to recovery of the debts due to banks and
financial institutions. Simultaneously, the jurisdiction of the civil courts
was barred and all pending matters were transferred to the Tribunals from the
date of their establishment. For some years, the new dispensation of
adjudication worked well. However, with the passage of time, proceedings before
the Debts Recovery Tribunals also started getting bogged down due to invoking
of technicalities by the borrowers. Faced with this situation, the Government
again asked the Narasimham Committee to suggest measures for expediting
recovery of debts etc. due to banks and financial institutions. In its 2nd
Report, Narasimham Committee observed that the non-performing assets of most of
the public sector banks were abnormally high and the existing mechanism for
recovery of the same was wholly insufficient. In Chapter VIII of the report,
the Committee observed that the evaluation of legal frame work has not kept
pace with the changing commercial practice and financial sector reforms and as
a result of this the economy has not been able to reap full benefits of the
reform process. By way of illustration, the Committee referred to the scheme of
mortgage under the Transfer of Property Act and suggested that the existing
laws should be changed not only for facilitating speedy recovery of the dues of
banks etc. but also for quick resolution of disputes arising out of the action
taken for recovery of such dues. Andhyarujina Committee constituted by the
Central Government for examining banking sector reforms also considered the
need for changes in the legal system. Both Narasimham and Andhyarujina
Committees suggested enactment of new legislation for securitisation and
empowering the banks and financial institutions to take possession of the
securities and sell them without intervention of the court. In the backdrop of
these recommendations, the Parliament enacted the Securitisation Act.
Scheme of the DRT Act
and Rules made thereunder
18.
Section
2(g) of the DRT Act (as it stood before being amended by Act No. 30/2004)
defined "debt" as - "any liability (inclusive of interest) which
is alleged as due from any person by a bank or a financial institution or by a
consortium of banks or financial institutions during the course of any business
activity undertaken by bank or financial institution or the consortium under any
law for the time being in force, in cash or otherwise, whether secured or
unsecured, or whether payable under a decree or order of any civil court or
otherwise and subsisting on, and legally recoverable on, the date of the
application." After the amendment of 2004, "debt"
means "any
liability (inclusive of interest) which is alleged as due from any person by a
bank or a financial institution or by a consortium of banks or financial
institutions during the course of any business activity undertaken by the bank
or the financial institution or the consortium under any law for the time being
in force, in cash or otherwise, whether secured or unsecured, or assigned, or
whether payable under a decree or order of any civil court or any arbitration
award or otherwise or under a mortgage and subsisting on, and legally
recoverable on, the date of the application."
The provisions
contained in Chapter II envisage establishment of the Debts Recovery Tribunals
and the Debts Recovery Appellate Tribunals, qualifications of Presiding
Officers and Members, term of their office, staff of the tribunals, salaries,
allowances, etc. Section 17(1) of the DRT Act declares that a Tribunal shall
have the jurisdiction, powers and authority to entertain and decide
applications made by banks and financial institutions for recovery of debts due
to them. Under Section 17(2), the Appellate Tribunal has been vested with
jurisdiction, powers and authority to entertain appeal against any order made
or deemed to have been made by a Tribunal. Section 18 expressly bars the
jurisdiction, powers and authority of all courts except the Supreme Court and a
High Court exercising jurisdiction under Articles 226 and 227 of the
Constitution of India in relation to matters specified in Section 17. Section
19, which finds place in Chapter IV of the DRT Act contains procedure required
to be followed by the Tribunal for deciding an application made for recovery of
debt. It envisages making of application by a bank or a financial institution
for recovery of any debt from any person, issue of summons to the defendant to
show cause as to why relief prayed for may not be granted to the applicant and
also provides for passing of appropriate orders. By amending Act No.30/2004,
three provisos were inserted in Section 19(1). In terms of first proviso, a
bank or a financial institution can, after obtaining permission of the DRT,
withdraw the original application for the purpose of taking action under the
Securitisation Act.
Second proviso lays
down that an application for withdrawal filed under first proviso must be
disposed of within 30 days. The third proviso requires recording of reasons in
case the Tribunal refuses permission or leave for withdrawal of application
under Section 19(1). Section 19(6) provides for the defendant's claim to
set-off against the bank's demand for a certain sum of money. Section 19(8)
gives right to the defendant to set up a counter claim. Section 19(12) empowers
the Tribunal to make an interim order by way of injunction, stay or attachment
before judgment debarring the defendant from transferring, alienating or
otherwise dealing with, or disposing of, his properties and assets. Under
Section 19(13), the Tribunal is empowered to direct the defendant to furnish
security where it is satisfied that the defendant is likely to dispose of the
property or cause damage to the property in order to defeat the decree which
may ultimately be passed in favour of bank or financial institution.
Section 19(18),
empowers the Tribunal to appoint a receiver of any property on the ground of
equity. This can be done before or after grant of certificate for recovery of
debt. Under Section 19(19), a recovery certificate issued against a company can
be enforced by the Tribunal which can order the property to be sold and the
sale proceeds distributed amongst the secured creditors in accordance with the
provisions of Section 529A of the Companies Act, 1956 and pay the
balance/surplus, if any, to the debtor-company. Section 20(1) lays down that
any person aggrieved by an order made, or deemed to have been made, by a
Tribunal may prefer an appeal to the Appellate Tribunal. Sub-section (2) of
Section 20 declares that no appeal shall lie from an order made by the Tribunal
with the consent of the parties. Sub-section (3) prescribes the period of
limitation i.e. 45 days. Proviso to this sub-section empowers the Tribunal to
entertain an appeal after the expiry of 45 days if it is satisfied that there
was sufficient cause for not filing the appeal within the prescribed period.
Sub- sections (4) to (6) contain the procedure to be followed by the Appellate
Tribunal for disposal of an appeal. Section 21 lays down that the Appellate
Tribunal shall not entertain an appeal unless the person preferring appeal
deposits 75 per cent of the amount determined by the Tribunal under Section 19.
Section 22 lays down that the Tribunal and the Appellate Tribunal shall not be
bound by the procedure contained in the Code of Civil Procedure, but shall be
guided by the principles of natural justice and subject to the other provisions
of the Act or rules made thereunder, the Tribunal and the Appellate Tribunal
shall be free to regulate their own procedure. Section 25 specifies three modes
of recovery of debt, namely, (a) attachment and sale, (b) arrest of the
defendant and (c) appointment of a receiver for the management of the
properties of the defendant. Other modes of recovery are specified in Section
28 which states that where a certificate has been issued by the Tribunal under
Section 19(7), the Recovery Officer may, without prejudice to the modes of
recovery specified in Section 25, recover the amount of debt by any one or more
of the modes mentioned in Section 28. By Section 29, the provisions of Second
and Third Schedules to the Income Tax Act, 1961 and the Income Tax (Certificate
Proceedings) Rules, 1962 have been made applicable to the recovery proceedings.
Section 31(1) states that every suit or other proceeding pending before any
court immediately before the date of establishment of a Tribunal, shall stand
transferred to the Tribunal if the subject matter thereof would have been
within its jurisdiction had the cause of action arisen after establishment of
the Tribunal. Section 31A lays down that where a decree or order was passed by
any court before the commencement of the Recovery of Debts Due to Banks and
Financial Institutions (Amendment) Act, 2000 and the same had not been
executed, then the decree-holder can apply to the Tribunal for recovery of the
amount. Sub-section (1) of Section 34 contains a non obstante clause and
declares that save as otherwise provided in sub-section (2), provisions of the
DRT Act shall have effect notwithstanding anything inconsistent therewith contained
in any other law for the time being in force or in any instrument having effect
by virtue of any law other than that Act. Amended sub-section (2) of Section 34
lays down that the provisions of the DRT Act or rules made there under shall be
in addition to and not in derogation of Industrial Finance Corporation Act, 1948, The State Financial
Corporation Act, 1951, The Unit Trust of India Act, 1963, Industrial
Reconstruction Bank of India Act, 1984 and the Small Industries Development
Bank of India Act, 1989.
19.
In
exercise of the power conferred upon it under Section 36 of the DRT Act, the
Central Government has framed the Debts Recovery Tribunal (Procedure) Rules,
1993. These rules regulate the procedure for filing application in the
prescribed form, scrutiny thereof, fee for application, contents of
application, documents to be filed with the application, filing of reply and
documents by the respondent, date and place of hearing of the application, the
manner of recording the order, publication of order and communication thereof
to the parties. By an amendment made in 1997, Rule 5A was added to enable a
party to apply for review of the order made by the Tribunal on the ground of
some mistake or error apparent on the face of the record. For regulating the
procedure of the Appellate Tribunal, the Central Government has framed the
Debts Recovery Appellate Tribunal (Procedure) Rules, 1994. The provisions
contained in these rules are similar to those contained in the rules regulating
the procedure of the Tribunal.
Scheme of the
Securitisation Act and Rules made there under
20.
Section
2(b) defines "asset reconstruction" to mean acquisition by any
Securitisation company or reconstruction company of any right or interest of
any bank or financial institution in any financial assistance for the purpose
of realisation of such financial assistance. Section 2(f) defines the word
"borrower" to mean, any person who has been granted financial
assistance by any bank or financial institution or who has given any guarantee
or created any mortgage or pledge as security for the financial assistance
granted by any bank or financial institution. It includes a person who becomes
borrower of a securitisation company or reconstruction company consequent upon
acquisition by it of any right or interest of any bank or financial institution
in relation to such financial assistance. Section 2(ha) declares that
"debt" shall have the meaning assigned to it in clause (g) of Section
2 of the DRT Act. Section 2(k) defines "financial assistance" to mean
any loan or advance or any debentures or bonds subscribed or any guarantees
given or letters of credit established or any other credit facility extended by
any bank or financial institution.
Section 2(l) defines
"financial asset" to mean any debt or receivables and includes a
claim to any debt or receivables or part thereof, whether secured or unsecured
or any debt or receivables secured by, mortgage of, or charge on, immovable
property, or a mortgage, charge, hypothecation or pledge of movable property or
any right or interest in the security, whether full or part underlying such
debt or receivables or any beneficial interest in property, whether movable or
immovable, or in such debt, receivables, whether such interest is existing,
future, accruing, conditional or contingent or any financial assistance.
Section 2(n) defines "hypothecation" to mean a charge created by a
borrower in favour of a secured creditor as a security for financial
assistance. Section 2(o) defines "non-performing asset" to mean an
asset or account of a borrower which has been classified by a bank or financial
institution as sub-standard, doubtful or loss asset. Section 2(z) defines
"Securitisation" to mean acquisition of financial assets by any
securitisation company or reconstruction company from any originator whether by
raising of funds by such securitisation company or reconstruction company from
qualified institutional buyers by issue of security receipts representing
undivided interest in such financial assets or otherwise.
Section 2(zc) defines
"secured asset" to mean the property on which security interest is
created. Section 2(zd) defines "secured creditor" to mean any bank or
financial institution or any consortium or group of banks or financial
institutions and includes (i) debenture trustee appointed by any bank or
financial institutions, or (ii) securitisation company or reconstruction
company, whether acting as such or managing a trust set up by such
securitization company or reconstruction company for the securitisation or
reconstruction, as the case may be, or (iii) any other trustee holding
securities on behalf of a bank or financial institution, in whose favour
security interest is created for due repayment by any borrower of any financial
assistance. Section 2(ze) defines a "secured debt" to mean a debt
which is secured by any security interest. Section 2(zf) defines "security
interest" to mean right, title and interest of any kind whatsoever upon
property, created in favour of any secured creditor and includes any mortgage,
charge, hypothecation and assignment."
Chapter II which
contains Sections 3 to 12 deals with regulation of securitisation and
reconstruction of financial assets of banks and financial institutions. Chapter
III deals with enforcement of security interest. It comprises of seven sections
including Section 13 which is crucial for decision of these appeals.
Sub-section (1) of
Section 13 contains a non obstante clause. It lays down that notwithstanding
anything contained in Sections 69 or 69A of the Transfer of Property Act, any
security interest created in favour of any secured creditor may be enforced, without
the intervention of the Court or Tribunal, by such creditor in accordance with
the provisions of this Act. Sub-section (2) of Section 13 enumerates first of
many steps needed to be taken by the secured creditor for enforcement of
security interest. This sub-section provides that if a borrower, who is under a
liability to a secured creditor, makes any default in repayment of secured debt
and his account in respect of such debt is classified as non-performing asset,
then the secured creditor may require the borrower by notice in writing to
discharge his liabilities within sixty days from the date of the notice with an
indication that if he fails to do so, the secured creditor shall be entitled to
exercise all or any of its rights in terms of Section 13(4). Sub-section (3) of
Section 13 lays down that notice issued under Section 13(2) shall contain
details of the amount payable by the borrower as also the details of the
secured assets intended to be enforced by bank or financial institution.
Sub-section (3-A) of Section 13 lays down that the borrower may make a
representation in response to the notice issued under Section 13(2) and
challenge the classification of his account as non-performing asset as also the
quantum of amount specified in the notice. If the bank or financial institution
comes to the conclusion that the representation/objection of the borrower is
not acceptable, then reasons for non acceptance are required to be communicated
within one week. Sub-section (4) of Section 13 specifies various modes which
can be adopted by the secured creditor for recovery of secured debt. The
secured creditor can take possession of the secured assets of the borrower and
transfer the same by way of lease, assignment or sale for realizing the secured
assets. This is subject to the condition that the right to transfer by way of
lease etc. shall be exercised only where substantial part of the business of
the borrower is held as secured debt. If the management of whole or part of the
business is severable, then the secured creditor can take over management only
of such business of the borrower which is relatable to security. The secured
creditor can appoint any person to manage the secured asset, the possession of
which has been taken over. The secured creditor can also, by notice in writing,
call upon a person who has acquired any of the secured assets from the borrower
to pay the money, which may be sufficient to discharge the liability of the
borrower. Sub-section (7) of Section 13 lays down that where any action has
been taken against a borrower under sub-section (4), all costs, charges and
expenses properly incurred by the secured creditor or any expenses incidental
thereto can be recovered from the borrower. The money which is received by the
secured creditor is required to be held by him in trust and applied, in the
first instance, for such costs, charges and expenses and then in discharge of
dues of the secured creditor. Residue of the money is payable to the person
entitled thereto according to his rights and interest. Sub-section (8) imposes
a restriction on the sale or transfer of the secured asset if the amount due to
the secured creditor together with costs, charges and expenses incurred by him
are tendered at any time before the time fixed for such sale or transfer.
Sub-section (9) deals with the situation in which more than one secured
creditor has stakes in the secured assets and lays down that in the case of
financing a financial asset by more than one secured creditor or joint
financing of a financial asset by secured creditors, no individual secured
creditor shall be entitled to exercise any or all of the rights under
sub-section (4) unless all of them agree for such a course. There are five
unnumbered provisos to Section 13(9) which deal with pari passu charge of the
workers of a company in liquidation. The first of these provisos lays down that
in the case of a company in liquidation, the amount realized from the sale of
secured assets shall be distributed in accordance with the provisions of
Section 529A of the Companies Act, 1956. The second proviso deals with the case
of a company being wound up on or after the commencement of this Act. If the
secured creditor of such company opts to realize its security instead of
relinquishing the same and proving its debt under Section 529(1) of the Companies
Act, then it can retain sale proceeds after depositing the workmen's dues with
the liquidator in accordance with Section 529A. The third proviso requires the
liquidator to inform the secured creditor about the dues payable to the workmen
in terms of Section 529A. If the amount payable to the workmen is not certain,
then the liquidator has to intimate the estimated amount to the secured
creditor. The fourth proviso lays down that in case the secured creditor
deposits the estimated amount of the workmen's dues, then such creditor shall
be liable to pay the balance of the workmen's dues or entitled to receive the
excess amount, if any, deposited with the liquidator. In terms of fifth
proviso, the secured creditor is required to give an undertaking to the
liquidator to pay the balance of the workmen's dues, if any. Sub- section (10)
lays down that where dues of the secured creditor are not fully satisfied by
the sale proceeds of the secured assets, the secured creditor may file an
application before the Tribunal under Section 17 for recovery of balance amount
from the borrower. Sub-section (11) states that without prejudice to the rights
conferred on the secured creditor under or by this section, it shall be
entitled to proceed against the guarantors or sell the pledged assets without
resorting to the measures specified in clauses (a) to (d) of sub-section (4) in
relation to the secured assets. Sub-section (12) lays down that rights
available to the secured creditor under the Act may be exercised by one or more
of its officers authorised in this behalf. Sub-section (13) lays down that after
receipt of notice under sub-section (2), the borrower shall not transfer by way
of sale, lease or otherwise (other than in the ordinary course of his business)
any of his secured assets referred to in the notice without prior written
consent of the secured creditor. Section 14 represents semblance of court's
intervention by way of assistance to a secured creditor in taking possession of
the secured asset. The secured creditor can, for the purpose of taking
possession or control of any secured asset, request in writing to the Chief
Metropolitan Magistrate or the District Magistrate within whose jurisdiction
the secured asset or other document relating thereto is situated or found to
take possession thereof. If such request is made, the Chief Metropolitan
Magistrate or the District Magistrate, as the case may be, is obliged to take
possession of such asset and document and forward the same to the secured
creditor. Section 17 speaks of the remedies available to any person including
borrower who may feel aggrieved by the action taken by the secured creditor
under sub-section (4) of Section 13. Such an aggrieved person can make an
application to the Tribunal within 45 days from the date on which action is
taken under that sub-section. By way of abundant caution, an explanation has
been added to Section 17(1) and it has been clarified that the communication of
reasons to the borrower in terms of Section 13(3A) shall not constitute a
ground for filing application under Section 17(1). Sub-section (2) of Section 17
casts a duty on the Tribunal to consider whether the measures taken by the
secured creditor for enforcement of security interest are in accordance with
the provisions of the Act and rules made thereunder. If the Tribunal, after
examining the facts and circumstances of the case and evidence produced by the
parties, comes to the conclusion that the measures taken by the secured
creditor are not in consonance with sub-section (4) of Section 13, then it can
direct the secured creditor to restore management of the business or possession
of the secured assets to the borrower. On the other hand, if the Tribunal finds
that the recourse taken by the secured creditor under sub-section (4) of
Section 13 is in accordance with the provisions of the Act and the rules made
thereunder, then, notwithstanding anything contained in any other law for the
time being in force, the secured creditor can take recourse to one or more of
the measures specified in Section 13(4) for recovery of its secured debt.
Sub-section (5) of Section 17 prescribes the time limit of sixty days within
which an application made under Section 17 is required to be disposed of.
Proviso to this sub-section envisages extension of time, but the outer limit
for adjudication of an application is four months. If the Tribunal fails to
decide the application within a maximum period of four months, then either
party can move the Appellate Tribunal for issue of a direction to the Tribunal
to dispose of the application expeditiously. Section 18 provides for an appeal
to the Appellate Tribunal. Section 34 lays down that no civil court shall have
jurisdiction to entertain any suit or proceeding in respect of any matter which
a Tribunal or Appellate Tribunal is empowered to determine. It further lays
down that no injunction shall be granted by any court or other authority in
respect of any action taken or to be taken under the Securitisation Act or DRT
Act.
Section 35 of the
Securitisation Act is substantially similar to Section 34(1) of the DRT Act. It
declares that the provisions of this Act shall have effect notwithstanding
anything inconsistent therewith contained in any other law for the time being
in force or any instrument having effect by virtue of any such law. Section 37,
which is similar to Section 34(2) of the DRT Act lays down that the provisions
of this Act or the Rules made thereunder shall be in addition to, and not in
derogation of, the Companies Act, 1956, the Securities Contracts (Regulation)
Act, 1956, the Securities and Exchange Board of India Act, 1992, the Recovery
of Debts Due to Banks and Financial Institutions Act, 1993 or any other law for
the time being in force.
21. In exercise of
powers vested in it under Sections 38(1) and (2)(b) read with Sections 13(4),
(10) and (12) of the Securitisation Act, the Central Government framed the
Security Interest (Enforcement) Rules, 2002. Rule 3 prescribes the mode of
service of demand notice. Rule 4 details the procedure to be followed after
issue of demand notice. Various sub-rules of this rule specify the mode of
taking possession of moveable security assets, their preservation and
protection, valuation and sale. Rule 8 lays down similar procedure in respect
of immovable security assets. Rule 9 regulates time of sale, issue of sale
certificate and delivery of possession to the purchaser. Rule 10 provides for
appointment of manager of the security assets of which possession has been
taken over by the secured creditor. Rule regulates procedure for recovery of
shortfall of secured debt.
21.
An
analysis of the above noted provisions makes it clear that the primary object
of the DRT Act was to facilitate creation of special machinery for speedy
recovery of the dues of banks and financial institutions. This is the reason
why the DRT Act not only provides for establishment of the Tribunals and
Appellate Tribunals with the jurisdiction, powers and authority to make summary
adjudication of applications made by banks or financial institutions and
specifies the modes of recovery of the amount determined by the Tribunal or
Appellate Tribunal but also bars the jurisdiction of all courts except the
Supreme Court and High Courts in relation to the matters specified in Section
17. The Tribunals and Appellate Tribunals have also been freed from the
shackles of procedure contained in the Code of Civil Procedure. To put it
differently, the DRT Act has not only brought into existence special procedural
mechanism for speedy recovery of the dues of banks and financial institutions,
but also made provision for ensuring that defaulting borrowers are not able to
invoke the jurisdiction of civil courts for frustrating the proceedings
initiated by the banks and financial institutions.
22.
The
enactment of the Securitisation Act can be treated as one of the most radical
legislative measures taken by the Government for ensuring that dues of secured
creditors including banks, financial institutions are recovered from the
defaulting borrowers without any obstruction. For the first time, the secured
creditors have been empowered to take measures for recovery of their dues
without the intervention of the Courts or Tribunals. The Securitisation Act has
also brought into existence a new dispensation for registration and regulation
of securitisation companies or reconstruction companies, facilitating
securitisation of financial assets of banks and financial institutions, easy
transferability of financial assets by the securitisation company or
reconstruction company to acquire financial assets of banks and financial
institutions by issue of debentures or bonds or any other security in the
nature of debenture, empowering the securitisation companies or reconstruction
companies to raise funds by issue of security receipts to qualified
institutional buyers, facilitating reconstruction of financial assets acquired
by exercising power of enforcement of securities or change of management,
declaration of any securitisation company or reconstruction company as a public
financial institution for the purpose of Section 4A of the Companies Act,
defining `security interest' as any type of security including mortgage and
charge on immovable properties given for due payment of any financial
assistance given by any bank or financial institution, classification of
borrowers account as non-performing asset and above all empowering banks and
financial institutions to take possession of securities given for financial
assistance and sale or lease the same or take over management.
23.
In
the light of the above, we shall now consider whether there is any conflict
between the DRT Act and Securitisation Act on one hand and the Bombay and
Kerala Acts and similar State legislations on the other, and whether by virtue
of non obstante clauses contained in Section 34(1) of the DRT Act and Section
35 of the Securitisation Act, the provisions contained in those legislations
override Section 38C of the Bombay Act, Section 26B of the Kerala Act and
similar other State legislations.
For reference sake,
these provisions are reproduced below:
DRT Act "34. Act
to have over-riding effect.--(1) Save as otherwise provided in sub-section (2),
the provisions of this Act shall have effect notwithstanding anything
inconsistent therewith contained in any other law for the time being in force
or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of
this Act or the rules made thereunder shall be in addition to, and not in
derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the
State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India
Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984
(62 of 1984), the Sick Industrial Companies (Special Provisions) Act, 1985 and
the Small Industries Development Bank of India Act, 1989." Securitisation
Act "35. The provisions of this Act to override other laws.-The provisions
of this Act shall have effect, notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or any instrument having
effect by virtue of any such law."
37. Application of
other laws not barred.--The provisions of this Act or the rules made thereunder
shall be in addition to, and not in derogation of, the Companies Act, 1956 (1
of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the
Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any
other law for the time being in force." Bombay Sales Tax Act, 1959
"38C. Liability Under this Act to be First Charge- Notwithstanding
anything contained in any contract to the contrary but subject to any provision
regarding first charge in any Central Act for the time being in force, any
amount of tax, penalty, interest or any other sum, payable by a dealer or any
other person under this Act shall be the first charge on the property of the
dealer, or, as the case may be, person."
Kerala General Sales
Tax Act, 1963 "26B. Tax payable to be first charge on the property.--
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 another person under this Act, shall be the
first charge on the property of the dealer, or such person."
Section 14A of the Workmen's
Compensation Act, 1923, Section 11 of the Employees' Provident Funds and
Miscellaneous Provisions Act, 1952 (for short `the EPF Act'), Section 74(1) of
the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals
(Development and Regulation) Act, 1957, Section 30 of the Gift Tax Act, 1958
and Section 529A of the Companies Act, 1956 are some of the Central
legislations by which statutory first charge has been created in favour of the
State or workers, read as under:- Workmen's Compensation Act, 1923 "14A.
Compensation to be first charge on assets transferred by employer.- Where an
employer transfers his assets before any amount due in respect of any
compensation, the liability wherefor accrued before the date of the transfer,
has been paid, such amount shall, notwithstanding anything contained in any
other law for the time being in force, be a first charge on that part of the
assets so transferred as consists of immovable property." Employees'
Provident Funds and Miscellaneous Provisions Act, 1952 "11. Priority of
payment of contributions over other debts.- (1) Where any employer is
adjudicated insolvent or, being a company, an order for winding up is made, the
amount due- (a) from the employer in relation to an establishment to which any
Scheme or the Insurance Scheme applies in respect of any contribution payable
to the Fund or, as the case may be, the Insurance Fund, damages recoverable
under section 14B, accumulations required to be transferred under sub-section
(2) of section 15 or any charges payable by him under any other provision of
this Act or of any provision of the Scheme or the Insurance Scheme; or (b) from
the employer in relation to an exempted establishment in report of any
contribution to the provident fund or any insurance fund in so far it relates
to exempted employees, under the rules of the provident fund or any insurance
fund, any contribution payable by him towards the Pension Fund under
sub-section (6) of section 17, damages recoverable under section 14B or any
charges payable by him to the appropriate Government under any provision of
this Act or under any of the conditions specified under section 17, shall,
where the liability therefor has accrued before the order of adjudication or
winding up is made, be deemed to be included among the debts which under
section 49 of the Presidency-towns Insolvency Act, 1909 (3 of 1909), or under
section 61 of the Provincial Insolvency Act, 1920 (5 of 1920), or under section
530 of the Companies Act, 1956 (1 of 1956) are to be paid in priority to all
other debts in the distribution of the property of the insolvent or the assets
of the company being wound up, as the case may be.
Explanation. - In
this sub-section and in section 17, "insurance fund" means any fund
established by an employer under any scheme for providing benefits in the
nature of life insurance to employees, whether linked to their deposits in
provident fund or not, without payment by the employees of any separate
contribution or premium in that behalf. 11(2) Without prejudice to the
provisions of sub-section (1), if any amount is due from an employer, whether in
respect of the employee's contribution deducted from the wages of the employee
or the employer's contribution, the amount so due shall be deemed to be the
first charge on the assets of the establishment, and shall, notwithstanding
anything contained in any other law, for the time being in force, be paid in
priority to all other debts."
Estate Duty Act, 1953
"74(1). Estate duty a first charge on property liable thereto.- (1)
Subject to the provisions of section 19, the estate duty payable in respect of
property, movable or immovable, passing on the death of the deceased, shall be
a first charge on the immovable property so passing (including agricultural
land) in whomsoever it may vest on his death after the debts and encumbrances
allowable under Part VI of this Act; and any private transfer or delivery of
such property shall be void against any claim in respect of such estate
duty."
Mines and Minerals
(Development and Regulation) Act, 1957 "25(2). Any rent, royalty, tax, fee
or other sum due to the Government either under this Act or any rule made
thereunder or under the terms and conditions of any reconnaissance permit,
prospecting licence or mining lease may, on a certificate of such officer as
may be specified by the State Government in this behalf by general or special
order, be recovered in the same manner as if it were an arrear of land revenue
and every such sum which becomes due to the Government after the commencement
of the Mines and Minerals (Regulation and Development) Amendment Act, 1972,
together with the interest due thereon shall be a first charge on the assets of
the holder of the reconnaissance permit, prospecting licence or mining lease,
as the case may be."
Gift-Tax Act (18 of
1958) "30. Gift-tax to be charged on property gifted. - Gift-tax payable
in respect of any gift comprising immovable property shall be a first charge on
that property but any such charge shall not affect the title of a bona fide
purchaser for valuable consideration without notice of the charge."
Companies Act, 1956:
"529A.
Overriding preferential payments.-- Notwithstanding anything contained in any
other provision of this Act or any other law for the time being in force, in
the winding up of a company - (a) workmen's dues; and (b) debts due to secured
creditors to the extent such debts rank under clause (c) of the proviso to
sub-section (1) of section 529 pari passu with such dues, shall be paid in
priority to all other debts.
(2) the debts payable
under clause (a) and clause (b) of sub-section (1) shall be paid in full,
unless the assets are insufficient to meet them, in which case they shall abate
in equal proportions."
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
Section
46B of the State Financial Corporations Act, 1951 (for short `the SFC Act')
which contains a non obstante clause similar to the one contained in Section
34(1) of the DRT Act and Section 35 of the Securitisation Act and the effect of
which was considered by a Division Bench of the Kerala High Court vis a vis
Section 11(2) of the EPF Act also read as under:- State Financial Corporations
Act, 1951 "46B. Effect of Act on other laws.- The provisions of this Act
and of any rules or orders made thereunder shall have effect notwithstanding
anything inconsistent therewith contained in any other law for the time being
in force or in the memorandum or articles of association of an industrial
concern or in any other instrument having effect by virtue of any law other
than this Act, but save as aforesaid, the provisions of this Act shall be in
addition to, and not in derogation of, any other law for the time being
applicable to an industrial concern."
25.
As
a prelude to the consideration of question relating to conflict between Central
and State legislations and priority, if any, given to the dues of banks,
financial institutions and other secured creditors under the DRT Act and
Securitisation Act, it will be useful to notice some rules of interpretation of
statutes, one of which is the rule of contextual interpretation. This rule
requires that the court should examine every word of a statute in its context.
In doing so, the Court has to keep in view preamble of the statute, other
provisions thereof, pari materia statutes, if any, and the mischief intended to
be remedied. Context often provides the key to the meaning of the word and the
sense it carries. Its setting gives colour to it and provides a cue to the
intention of the legislature in using it. In his famous work on Statutory
Interpretation, Justice G.P. Singh has quoted Professor H.A. Smith in the
following words:
"`No word', says
Professor H.A. Smith `has an absolute meaning, for no words can be defined in
vacuo, or without reference to some context'. According to Sutherland there is
a `basic fallacy' in saying `that words have meaning in and of themselves', and
`reference to the abstract meaning of words', states Craies, `if there be any
such thing, is of little value in interpreting statutes'.
... in determining
the meaning of any word or phrase in a statute the first question to be asked
is -- `What is the natural or ordinary meaning of that word or phrase in its
context in the statute? It is only when that meaning leads to some result which
cannot reasonably be supposed to have been the intention of the legislature,
that it is proper to look for some other possible meaning of the word or
phrase.' The context, as already seen in the construction of statutes, means
the statute as a whole, the previous state of the law, other statutes in pari
materia, the general scope of the statute and the mischief that it was intended
to remedy."
In Poppatlal Shah v.
State of Madras [AIR 1953 SC 274], this Court while construing the word `sale'
appearing in the Madras General Sales Tax Act, 1939 before its amendment in
1947, observed: "it is a settled rule of construction that to ascertain
the legislative intent, all the constituent parts of a statutes are to be taken
together, and each word, phrase or sentence is to be considered in the light of
the general purpose of the Act itself".
26.
In
Reserve Bank of India v. Peerless General Finance and Investment Company
Limited [(1987) 1 SCC 424], it was observed, "that interpretation is best
which makes the textual interpretation match the contextual." Speaking for
the Court, Chinappa Reddy, J. noted the importance of rule of contextual
interpretation and held:- "Interpretation must depend on the text and the
context. They are the bases of interpretation. One may well say if the text is
the texture, context is what gives the colour. Neither can be ignored.
Both are important.
That interpretation is best which makes the textual interpretation match the
contextual. A statute is best interpreted when we know why it was enacted. With
this knowledge, the statute must be read, first as a whole and then section by
section, clause by clause, phrase by phrase and word by word. If a statute is
looked at, in the context of its enactment, with the glasses of the
statute-maker, provided by such context, its scheme, the sections, clauses,
phrases and words may take colour and appear different than when the statute is
looked at without the glasses provided by the context. With these glasses we
must look at the Act as a whole and discover what each section, each clause,
each phrase and each word is meant and designed to say as to fit into the scheme
of the entire Act. No part of a statute and no word of a statute can be
construed in isolation. Statutes have to be construed so that every word has a
place and everything is in its place. It is by looking at the definition as a
whole in the setting of the entire Act and by reference to what preceded the
enactment and the reasons for it that the Court construed the expression `prize
chit' in Srinivasa [(1980) 4 SCC 507] and we find no reason to depart from the
Court's construction."
27.
In
R. v. National Asylum Support Services [(2002) 4 All ER 654], LORD STEYN
observed "the starting point is that language in all legal texts conveys
meaning according to the circumstances in which it was used. It follows that
context must always be identified and considered before the process of
construction or during it. It is, therefore, wrong to say that the court may
only resort to the evidence of contextual scene when an ambiguity has
arisen."
28.
A
non obstante clause is generally incorporated in a statute to give overriding
effect to a particular section or the statute as a whole. While interpreting
non obstante clause, the Court is required to find out the extent to which the
legislature intended to do so and the context in which the non obstante clause
is used.
This rule of
interpretation has been applied in several decisions. In State of West Bengal
v. Union of India [(1964) 1 SCR 371], it was observed that the Court must
ascertain the intention of the legislature by directing its attention not
merely to the clauses to be construed but to the entire statute; it must
compare the clause with the other parts of the law and the setting in which the
clause to be interpreted occurs.
29.
In
Madhav Rao Jivaji Rao Scindia v. Union of India and another [(1971) 1 SCC 85]
Hidayatullah, C.J. observed that the non obstante clause is no doubt a very
potent clause intended to exclude every consideration arising from other
provisions of the same statute or other statute but "for that reason alone
we must determine the scope" of that provision strictly. When the section
containing the said clause does not refer to any particular provisions which it
intends to override but refers to the provisions of the statute generally, it
is not permissible to hold that it excludes the whole Act and stands all alone
by itself. A search has, therefore, to be made with a view to determining which
provision answers the description and which does not.
30.
In
R.S. Raghunath v. State of Karnataka and another [(1992) 1 SCC 335], a
three-Judge Bench referred to the earlier judgments in Aswini Kumar Ghose v. Arabinda
Bose [AIR 1952 SC 369], Dominion of India v. Shrinbai A. Irani [AIR 1954 SC
596], Union of India v. G.M. Kokil [1984 (Supp.) SCC 196], Chandavarkar Sita
Ratna Rao v. Ashalata S. Guram [(1986) 4 SCC 447] and observed:
".........The
non-obstante clause is appended to a provision with a view to give the enacting
part of the provision an overriding effect in case of a conflict. But the
non-obstante clause need not necessarily and always be co-extensive with the
operative part so as to have the effect of cutting down the clear terms of an
enactment and if the words of the enactment are clear and are capable of a
clear interpretation on a plain and grammatical construction of the words the
non-obstante clause cannot cut down the construction and restrict the scope of
its operation. In such cases the non-obstante clause has to be read as
clarifying the whole position and must be understood to have been incorporated
in the enactment by the legislature by way of abundant caution and not by way
of limiting the ambit and scope of the Special Rules."
31.
In
A.G. Varadarajulu v. State of Tamil Nadu [(1998) 4 SCC 231], this Court relied
on Aswini Kumar Ghose's case. The Court while interpreting non obstante clause
contained in Section 21-A of Tamil Nadu Land Reforms (Fixation of Ceiling on
Land) Act, 1961 held :- "It is well settled that while dealing with a non
obstante clause under which the legislature wants to give overriding effect to
a section, the court must try to find out the extent to which the legislature
had intended to give one provision overriding effect over another provision.
Such intention of the legislature in this behalf is to be gathered from the
enacting part of the section. In Aswini Kumar Ghose v. Arabinda Bose Patanjali
Sastri, J.
observed:
"The enacting
part of a statute must, where it is clear, be taken to control the non obstante
clause where both cannot be read harmoniously;"
32.
The
DRT Act and Securitisation Act were enacted by Parliament in the backdrop of
recommendations made by the expert committees appointed by the Central
Government for examining the causes for enormous delay in the recovery of dues
of banks and financial institutions which were adversely affecting fiscal
reforms.
The committees headed
by Shri T. Tiwari and Shri M. Narasimham suggested that the existing legal
regime should be changed and special adjudicatory machinery be created for
ensuring speedy recovery of the dues of banks and financial institutions.
Narasimham and
Andhyarujina Committees also suggested enactment of new legislation for
securitisation and empowering the banks etc. to take possession of the
securities and sell them without intervention of the Court. The DRT Act
facilitated establishment of two-tier system of Tribunals. The Tribunals
established at the first level have been vested with the jurisdiction, powers
and authority to summarily adjudicate the claims of banks and financial institutions
in the matter of recovery of their dues without being bogged down by the
technicalities of the Code of Civil Procedure. The Securitisation Act
drastically changed the scenario inasmuch as it enabled banks, financial
institutions and other secured creditors to recover their dues without
intervention of the Courts or Tribunals. The Securitisation Act also made provision
for registration and regulation of securitisation/reconstruction companies,
securitisation of financial assets of banks and financial institutions and
other related provisions. However, what is most significant to be noted is that
there is no provision in either of these enactments by which first charge has
been created in favour of banks, financial institutions or secured creditors qua
the property of the borrower.
Under Section 13(1)
of the Securitisation Act, limited primacy has been given to the right of a
secured creditor to enforce security interest vis-`-vis Section 69 or Section
69A of the Transfer of Property Act. In terms of that sub-section, secured
creditor can enforce security interest without intervention of the Court or
Tribunal and if the borrower has created any mortgage of the secured asset, the
mortgagee or any person acting on his behalf cannot sell the mortgaged property
or appoint a receiver of the income of the mortgaged property or any part
thereof in a manner which may defeat the right of the secured creditor to
enforce security interest. This provision was enacted in the backdrop of
Chapter VIII of Narasimham Committee's 2nd Report in which specific reference
was made to the provisions relating to mortgages under the Transfer of Property
Act. In an apparent bid to overcome the likely difficulty faced by the secured
creditor which may include a bank or a financial institution, Parliament
incorporated the non obstante clause in Section 13 and gave primacy to the
right of secured creditor vis a vis other mortgagees who could exercise rights
under Sections 69 or 69A of the Transfer of Property Act. However, this primacy
has not been extended to other provisions like Section 38C of the Bombay Act
and Section 26B of the Kerala Act by which first charge has been created in
favour of the State over the property of the dealer or any person liable to pay
the dues of sales tax, etc. Sub-section (7) of Section 13 which envisages
application of the money received by the secured creditor by adopting any of
the measures specified under sub-section (4) merely regulates distribution of
money received by the secured creditor. It does not create first charge in
favour of the secured creditor. By enacting various provisos to sub-section
(9), the legislature has ensured that priority given to the claim of workers of
a company in liquidation under Section 529A of the Companies Act, 1956 vis a
vis secured creditors like banks is duly respected. This is the reason why
first of the five unnumbered provisos to Section 13(9) lays down that in the
case of a company in liquidation, the amount realized from the sale of secured
assets shall be distributed in accordance with the provisions of Section 529A
of the Companies Act, 1956. This and other provisos do not create first charge
in favour of the worker of a company in liquidation for the first time but
merely recognize the existing priority of their claim under the Companies Act.
It is interesting to note that the provisos to sub-section (9) of Section 13 do
not deal with the companies which fall in the category of borrower but which
are not in liquidation or are not being wound up. It is thus clear that
provisos referred to above are only part of the distribution mechanism evolved
by the legislature and are intended to protect and preserve the right of the
workers of a company in liquidation whose assets are subjected to the
provisions of the Securitisation Act and are disposed of by the secured creditor
in accordance with Section 13 thereof.
33.
The
non obstante clauses contained in Section 34(1) of the DRT Act and Section 35
of the Securitisation Act give overriding effect to the provisions of those
Acts only if there is anything inconsistent contained in any other law or
instrument having effect by virtue of any other law. In other words, if there
is no provision in the other enactments which are inconsistent with the DRT Act
or Securitisation Act, the provisions contained in those Acts cannot override
other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala
Act also contain non obstante clauses and give statutory recognition to the
priority of State's charge over other debts, which were recognized by Indian
High Courts even before 1950. In other words, these sections and similar
provisions contained in other State legislations not only create first charge
on the property of the dealer or any other person liable to pay sales tax, etc.
but also give them overriding effect over other laws. In Builders Supply
Corporation v. Union of India [(1965) 2 SCR 289], the Constitution Bench
considered the question whether tax payable to the Union of India has priority
over other debts.
After making a
reference to the judgments of the Bombay High Court in Bank of India v. John
Bowman and Ors., [AIR 1955 Bom. 305], Madras High Court in Kaka Mohammad Ghouse
Sahib & Co. v. United Commercial Syndicate and others [(1963) 49 I.T.R. 25]
and Manickam Chettiar v. Income-tax Officer, Madura, [(1938) 6 ITR 180], the
Court held :
(i) "The Common
Law doctrine of the priority of Crown debts had a wide sweep but the question
in the present appeal was the narrow one whether the Union of India was
entitled to claim that the recovery of the amount of tax due to it from a
citizen must take precedence and priority over unsecured debts due from the
said citizen to his other private creditors. The weight of authority in India
was strongly in support of the priority of tax dues.
(ii) The Common Law
doctrine on which the Union of India based its claim in the present proceedings
had been applied and upheld in that part of India which was known as `British
India' prior to the Constitution.
The rules of Common
Law relating to substantive rights which had been adopted by this country and
enforced by judicial decisions, amount to `law in force' in the territory of
India at the relevant time within the meaning of Art. 372 (1). In that view of
the matter, the contention of the appellant that after the Constitution was
adopted the position of the Union of India in regard to its claim for priority
in the present proceedings had been alerted could not be upheld.
(iii) The basic
justification for the claim for priority of Government debts rests on the
well-recognised principle that the State is entitled to raise money by
taxation, otherwise it will not be able to function as a sovereign government
at all. This consideration emphasizes the necessity and wisdom of conceding to
the State the right to claim priority in respect of its tax dues."
34.
In
State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation
and others [(1995) 2 SCC 19], the Court again recognized the priority of the
State's statutory first charge under Section 11-AAAA of the Rajasthan Sales Tax
Act, 1954 vis-`-vis claim of the bank to recover its dues from the borrower.
35.
In
Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and others [(2000) 5 SCC
694], the Court reviewed case law on the subject and observed:
"The principle
of priority of government debts is founded on the rule of necessity and of
public policy. The basic justification for the claim for priority of State
debts rests on the well-recognised principle that the State is entitled to
raise money by taxation because unless adequate revenue is received by the
State, it would not be able to function as a sovereign Government at all. It is
essential that as a sovereign, the State should be able to discharge its
primary governmental functions and in order to be able to discharge such functions
efficiently, it must be in possession of necessary funds and this consideration
emphasises the necessity and the wisdom of conceding to the State, the right to
claim priority in respect of its tax dues (see Builders Supply Corpn.). In the
same case the Constitution Bench has noticed a consensus of judicial opinion
that the arrears of tax due to the State can claim priority over private debts
and that this rule of common law amounts to law in force in the territory of
British India at the relevant time within the meaning of Article 372(1) of the
Constitution of India and therefore continues to be in force thereafter. On the
very principle on which the rule is founded, the priority would be available
only to such debts as are incurred by the subjects of the Crown by reference to
the State's sovereign power of compulsory exaction and would not extend to
charges for commercial services or obligation incurred by the subjects to the
State pursuant to commercial transactions. Having reviewed the available judicial
pronouncements their Lordships have summed up the law as under:
1. There is a
consensus of judicial opinion that the arrears of tax due to the State can
claim priority over private debts.
2. The common law
doctrine about priority of Crown debts which was recognised by Indian High
Courts prior to 1950 constitutes "law in force" within the meaning of
Article 372(1) and continues to be in force.
3. The basic
justification for the claim for priority of State debts is the rule of
necessity and the wisdom of conceding to the State the right to claim priority
in respect of its tax dues.
4. The doctrine may
not apply in respect of debts due to the State if they are contracted by
citizens in relation to commercial activities which may be undertaken by the State
for achieving socio-economic good. In other words, where the welfare State
enters into commercial fields which cannot be regarded as an essential and
integral part of the basic government functions of the State and seeks to
recover debts from its debtors arising out of such commercial activities the
applicability of the doctrine of priority shall be open for
consideration."
36.
In
State of M.P. and another v. State Bank of Indore and others [(2002) 10 SCC
441], this Court considered whether statutory first charge created under
Section 33-C of the M.P. General Sales Tax Act, 1958 would prevail over the
bank's charge.
The facts of that
case show that in 1974, respondent No.2 obtained a term loan from State Bank of
Indore and executed a promissory note and pledged certain machinery to the bank
for securing repayment of loan. Two more loans were taken by respondent no.2 in
1979. The bank sued respondent No.2 for recovery of its dues.
During the pendency
of the litigation, Section 33-C was inserted in the State Act. The State
claimed first charge under Section 33-C upon the machinery of respondent No.2
in lieu of sales tax dues. The trial Court and the High Court declined to
accept the State's claim. The High Court observed that the bank's charge on the
machinery was prior to the insertion of Section 33-C in the State Act and the
subsequent loans taken in 1979 do not alter the position in favour of the
State. The High Court then proceeded to hold that the charge created in favour
of the bank remain valid and operative till repayment of the loan. This Court
reversed the judgments of the trial Court and High Court and held:
"Section 33-C
creates a statutory first charge that prevails over any charge that may be in
existence. Therefore, the charge thereby created in favour of the State in
respect of the sales tax dues of the second respondent prevailed over the
charge created in favour of the Bank in respect of the loan taken by the second
respondent. There is no question of retrospectivity here, as, on the date when
it was introduced, Section 33-C operated in respect of all charges that were
then in force and gave sales tax dues precedence over them."
37.
Section
529A of the Companies Act and Section 11(2) of the EPF Act both of which are
Central legislations also contain non obstante clauses give statutory
recognition to the priority of workers dues over other debts. In Allahabad Bank
v. Canara Bank and another (supra), a two-Judge Bench recognized the priority
of workers dues under Section 529A of the Companies Act over other debts. In
Recovery Officer, Employees Provident Fund v. Kerala Financial Corporation
[(2002) 3 ILR Kerala 4], a Division Bench of Kerala High Court considered the
primacy of first charge created under Section 11(2) of the EPF Act vis-`-vis
Section 46B of the SFC Act. The facts of that case were that a company by name
M/s. Darpan Electronics (P) Ltd. had taken loan from the Kerala Financial
Corporation and mortgaged its immovable property for securing repayment. During
March 1990 and December 1990, the company defaulted in payment of contributions
to the Employees Provident Fund. It also committed default in repayment of
loan. The Kerala Financial Corporation sold the moveable assets of the company
for a sum of Rs.89,083/-. The recovery officer appointed under the EPF Act made
an application for recovery of provident fund contribution. He also attached 37
cents of land which had already been mortgaged by the company to the Financial
Corporation and prohibited the bank from transferring the amount of Rs.89,083/-
lying in the account of the company. The Corporation challenged this action by
filing writ petition under Article 226 of the Constitution, which was allowed
by the learned Single Judge. The Division Bench referred to Section 11(2) of
the EPF Act and held that the workers dues will have priority over other debts.
Speaking for the Bench, B.N. Srikrishna, CJ (as he then was) observed as under:
"Sub-section (2)
of section 11 of the EPF and MP Act has two facets. First, it declares that the
amount due from the employer towards contribution under the EPF and MP Act
shall be deemed to be the first charge on the assets of the establishment.
Second, it also declares that notwithstanding anything contained in any other
law for the time being in force, such debt shall be paid in priority to all
other debts. Both these provisions bring out the intention of the Parliament to
ensure the social benefit as contained in the legislation. There are other
provisions in the Act rendering the amounts of provident fund immune from
attachment of civil court's decree, which also indicate such intention of
Parliament."
The Division Bench
then considered the argument based on Section 100 of the Transfer of Property
Act and observed:
"With regard to
the argument based on section 100 of the Transfer of Property Act, the matter
is no longer res integra. In State Bank of Bikaner and Jaipur v. National Iron
and Steel Rolling Corporation and others, this question came up specifically
for consideration of the Supreme Court and the answer given by the Supreme
Court is unmistakably against the first respondent.
That was a case where
the State Bank of Bikaner claimed priority over sales tax arrears due to the
State on the ground that it was a secured creditor. Section 11 AAAA of the
Rajasthan Sales Tax Act declares that any amount of tax, penalty, interest and
any other sum, 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. On
behalf of the State Bank of Bikaner, section 100 of the Transfer of Property
Act was relied upon to contend that, since there was a mortgage in favour of
the Bank, the Bank would have precedence over the claim of sales tax dues,
which was only by way of a charge. After analysis of section 100 of the
Transfer of Property Act, and considering the distinction drawn between a
mortgage and charge as discussed in the earlier decision in Dattatreya Shanker
Mote v. Anand Chintaman Datar, it was held that the expression "transferee
of property used in section 100 refers to transferee of entire interest in the
property and it does not cover the transfer of only an interest in the property
by way of a mortgage. It was further held that the charge created under section
11 AAAA of Rajasthan Sales Tax Act over the property of the dealer or a person
liable to pay sales tax or other dues was created in respect of the entire
interest in respect of the property, since the section declares the dues of the
Sales Tax Department as a first charge, the first charge would operate over the
entire title of the property which continue with the mortgagor. Therefore, when
a statutory first charge is created on the property of the dealer, the interest
of the mortgage is not excluded from the first charge. The Supreme Court also
relied on Fisher and Lightwood's Law of Mortgage, 10th Edn. And the Judgment of
the Appeal Court in Westminister City Council v. Haymarket Publishing Ltd., and
finally concluded that since the statute created a first charge, it clearly
gave priority to the statutory charge over all other charges on the property
including a mortgage. The expression "first charge" was explained to mean
that, it would cover within its ambit a mortgage also.
Consequently, when a
first charge is created by statute, that charge will have precedence over an
existing mortgage."
The Division Bench
negatived the argument that non obstante clause contained in Section 46B of the
SFC Act will override Section 11(2) of the EPF Act by assigning the following
reasons:
"The contention
of the first respondent based on the overriding effect of section 46 B of the
S.F.C. Act has no substance in our judgment. Undoubtedly, the intention of
Parliament in enacting section 46 B in the year 1956 was to ensure that a State
Financial Corporation could quickly and effectively recover the amounts due by
taking possession of the property of the defaulter instead of having resort to
the cumbersome method of recovery through a court of law. While this was the
law, Parliament amended section 11 of the E.P.F. and M.P. Act by specifically
enacting sub-section (2) thereof, declaring that the amount due as contribution
to the Employees Provident Fund has first charge on the assets of the
establishment and that, notwithstanding anything contained in any other law for
the time being in force, it shall be paid in priority against all other debts.
In fact, the second facet of section 11(2) of the E.P.F. and M.P. Act goes one
step further than what is provided in section 46-B of S.F.C. Act. The reason
for this is obvious. While the State Financial Corporation would have to be
helped to recover the debts due to it from a defaulting debtor, the Provident
Fund payable to workers is of greater moment, since it is a matter of terminal
social security benefit made available by statute to the working class. Taking
into consideration that E.P.F. and M.P. Act is a social benefit legislation,
and the evil consequences of Provident Fund dues being defeated by prior claims
of secured or unsecured creditors, the Legislature took care to declare that
irrespective of when a debt is created, the dues under the E.P.F. and M.P. Act
would always remain first charge and shall be paid first out of the assets of
the establishment. We are also not impressed by the contention of the first
respondent that upon usage of non obstante clause in section 46 B of the S.F.C.
Act. Sub-section (2) of section 11 of E.P.F. Act is of subsequent date. No
doubt, both section 46 B of the S.F.C. Act and section 11(2) of the E.P.F. and
M.P. Act declare their intent by usage of the non obstante clause. But, since
section 11(2) of the E.P.F. and M.P. Act has been enacted later, we must
ascribe to the Parliament the intention to override the earlier legislation
also. It is, therefore, clear that section 11(2) of the E.P.F. and M.P. Act
overrides all provisions of other enactments including section 46 B of the
S.F.C. Act."
38.
While
enacting the DRT Act and Securitisation Act, Parliament was aware of the law
laid down by this Court wherein priority of the State dues was recognized.
If Parliament
intended to create first charge in favour of banks, financial institutions or
other secured creditors on the property of the borrower, then it would have
incorporated a provision like Section 529A of the Companies Act or Section
11(2) of the EPF Act and ensured that notwithstanding series of judicial
pronouncements, dues of banks, financial institutions and other secured
creditors should have priority over the State's statutory first charge in the
matter of recovery of the dues of sales tax, etc. However, the fact of the
matter is that no such provision has been incorporated in either of these
enactments despite conferment of extraordinary power upon the secured creditors
to take possession and dispose of the secured assets without the intervention
of the Court or Tribunal. The reason for this omission appears to be that the
new legal regime envisages transfer of secured assets to private companies. The
definition of "secured creditor" includes securitisation/reconstruction
company and any other trustee holding securities on behalf of bank/financial
institution. The definition of "securitisation company" and
"reconstruction company" in Section 2(v) and (za) shows that these
companies may be private companies registered under Companies Act, 1956 and
having a certificate of registration from the Reserve Bank under Section 3 of
Securitisation Act.
Evidently, Parliament
did not intend to give priority to the dues of private creditors over sovereign
debt of the State.
39.
If
the provisions of the DRT Act and Securitisation Act are interpreted keeping in
view the background and context in which these legislations were enacted and
the purpose sought to be achieved by their enactment, it becomes clear that the
two legislations, are intended to create a new dispensation for expeditious
recovery of dues of banks, financial institutions and secured creditors and
adjudication of the grievance made by any aggrieved person qua the procedure
adopted by the banks, financial institutions and other secured creditors, but
the provisions contained therein cannot be read as creating first charge in
favour of banks, etc. If Parliament intended to give priority to the dues of
banks, financial institutions and other secured creditors over the first charge
created under State legislations then provisions similar to those contained in
Section 14A of the Workmen's Compensation Act, 1923, Section 11(2) of the EPF
Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and
Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift- Tax
Act, and Section 529A of the Companies Act, 1956 would have been incorporated
in the DRT Act and Securitisation Act. Undisputedly, the two enactments do not
contain provision similar to Workmen's Compensation Act, etc. In the absence of
any specific provision to that effect, it is not possible to read any conflict
or inconsistency or overlapping between the provisions of the DRT Act and
Securitisation Act on the one hand and Section 38C of the Bombay Act and
Section 26B of the Kerala Act on the other and the non obstante clauses
contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation
Act cannot be invoked for declaring that the first charge created under the
State legislation will not operate qua or affect the proceedings initiated by
banks, financial institutions and other secured creditors for recovery of their
dues or enforcement of security interest, as the case may be. The Court could
have given effect to the non obstante clauses contained in Section 34(1) of the
DRT Act and Section 35 of the Securitisation Act vis a vis Section 38C of the
Bombay Act and Section 26B of the Kerala Act and similar other State
legislations only if there was a specific provision in the two enactments
creating first charge in favour of the banks, financial institutions and other
secured creditors but as the Parliament has not made any such provision in
either of the enactments, the first charge created by the State legislations on
the property of the dealer or any other person, liable to pay sales tax etc.,
cannot be destroyed by implication or inference, notwithstanding the fact that
banks, etc. fall in the category of secured creditors. In this connection,
reference may be made to the judgments in M.K. Ranganathan and another v.
Government of Madras and others [(1955) 2 SCR 374], State of Gujarat v. Shyamlal
Mohanlal Choksi and others [AIR 1965 SC 1251] and Byram Pestonji Gariwala v.
Union Bank of India and others [(1992) 1 SCC 31]. In M.K. Ranganathan's case, a
three-Judge Bench of this Court interpreted the expression "any sale held
without leave of the Court of any of the properties" which were added in
Section 232(1) of the Indian Companies Act, 1913 by amending Act No. XXII of
1936 and held that the said expression refers only to sales held through the
intervention of the Court and not to sales effected by the secured creditor
outside the winding up and without the intervention of the Court. While
answering in negative the question whether amendment was intended to bring
within the sweep of the general words "sales effected by the secured
creditor outside the winding up", in negative, the Court referred to
Maxwell on Interpretation of Statutes, the judgment of Privy Council in P.
Murugian v. Jainudeen, C.L. [(1954) 3 W.L.R. 682] and observed:
"It is a
legitimate rule of construction to construe words in an Act of Parliament with
reference to words found in immediate connection with them. It is also
well-recognized rule of construction that the legislature does not intend to
make a substantial alteration in the law beyond what it explicitly declares
either in express words or by clear implication and that the general words of
the Act are not to be so construed as to alter the previous policy of the law,
unless no sense or meaning can be applied to those words consistently with the
intention of preserving the existing policy untouched."
40.
In
Shyamlal Mohanlal Choksi's case (supra), the Constitution Bench considered
whether Section 94 of the Code of Criminal Procedure, 1898 apply to accused
person under trial and held that it does not. The Court referred to Article (3)
of the Constitution which declares that the accused cannot be compelled to
incriminate himself and observed:
"The Indian
Legislature was aware of the above fundamental canons of criminal jurisprudence
because in various sections of the Criminal Procedure Code it gives effect to
it. For example, in Section 175 it is provided that every person summoned by a
police officer in a proceeding under Section 174 shall be bound to attend and
to answer truly all questions other than questions the answers to which would
have a tendency to expose him to a criminal charge or to a penalty or
forfeiture. Section 343 provides that except as provided in Sections 337 and
338, no influence by means of any promise or threat or otherwise shall be used
to an accused person to induce him to disclose or withhold any matter within
his knowledge. Again, when the accused is examined under Section 342, the
accused does not render himself liable to punishment if he refuses to answer
any questions put to him. Further, now although the accused is a competent witness,
he cannot be called as a witness except on his own request in writing. It is
further provided in Section 342-A that his failure to give evidence shall not
be made the subject of any comment by any parties or the court or give rise to
any presumption against himself or any person charged together with him at the
same trial.
It seems to us that
in view of this background the Legislature, if it were minded to make Section
94 applicable to an accused person, would have said so in specific words. It is
true that the words of Section 94 are wide enough to include an accused person
but it is well-recognised that in some cases a limitation may be put on the
construction of the wide terms of a statute (vide Craies on Statute Law, p.
177). Again it is a rule as to the limitation of the meaning of general words
used in a statute that they are to be, if possible, construed as not to alter
the common law (vide Craies on Statute Law, p. 187)."
41.
In
Byram Pestonji Gariwala's case (supra), the Court considered the question
whether the amendment made in the Code of Civil Procedure in 1976 had the
effect of curtailing the authority of counsel to compromise the matter,
referred to some English decisions and observed:
"It is a rule of
legal policy that law should be altered deliberately rather than casually.
Legislature does not make radical changes in law `by a sidewind, but only by
measured and considered provisions'. (Francis Bennion's Statutory
Interpretation, Butterworths, 1984, para 133). As stated by Lord Devlin in
National Assistance Board v. Wilkinson: (QB p. 661) "It is a well
established principle of construction that a statute is not to be taken as
effecting a fundamental alteration in the general law unless it uses words that
point unmistakably to that conclusion."
Statutes relating to
remedies and procedure must receive a liberal construction `especially so as to
secure a more effective, a speedier, a simpler, and a less expensive
administration of law'.
See Crawford's
Statutory Construction, para 254. The object of the amendment was to provide an
appropriate remedy to expedite proceedings in court. That object must be borne
in mind by adopting a purposive construction of the amended provisions. The
legislative intention being the speedy disposal of cases with a view to
relieving the litigants and the courts alike of the burden of mounting arrears,
the word `parties' must be so construed as to yield a beneficent result, so as
to eliminate the mischief the legislature had in mind.
There is no reason to
assume that the legislature intended to curtail the implied authority of
counsel, engaged in the thick of proceedings in court, to compromise or agree
on matters relating to the parties, even if such matters exceed the subject
matter of the suit. The relationship of counsel and his party or the recognised
agent and his principal is a matter of contract; and with the freedom of
contract generally, the legislature does not interfere except when warranted by
public policy, and the legislative intent is expressly made manifest. There is
no such declaration of policy or indication of intent in the present case. The
legislature has not evinced any intention to change the well recognised and
universally acclaimed common law tradition of an ever alert, independent and
active bar with freedom to manoeuvre with force and drive for quick action in a
battle of wits typical of the adversarial system of oral hearing which is in
sharp contrast to the inquisitorial traditions of the `civil law' of France and
other European and Latin American countries where written submissions have the
pride of place and oral arguments are considered relatively insignificant. (See
Rene David, English Law and French Law -- Tagore Law Lectures, 1980). `The
civil law' is indeed equally efficacious and even older, but it is the product
of a different tradition, culture and language; and there is no indication,
whatever, that Parliament was addressing itself to the task of assimilating or
incorporating the rules and practices of that system into our own system of
judicial administration.
So long as the system
of judicial administration in India continues unaltered, and so long as
Parliament has not evinced an intention to change its basic character, there is
no reason to assume that Parliament has, though not expressly, but impliedly
reduced counsel's role or capacity to represent his client as effectively as in
the past. On a matter of such vital importance, it is most unlikely that
Parliament would have resorted to implied legislative alteration of counsel's
capacity or status or effectiveness. In this respect, the words of Lord Atkin
in Sourendra comparing the Indian advocate with the advocate in England,
Scotland and Ireland, are significant: (AIR p. 161) "There are no local
conditions which make it less desirable for the client to have the full benefit
of an advocate's experience and judgment. One reason, indeed, for refusing to
imply such a power would be a lack of confidence in the integrity or judgment
of the Indian advocate. No such considerations have been or indeed could be
advanced, and their Lordships mention them but to dismiss them."
42.
We
may now advert to the judgments of this Court in Allahabad Bank's case (supra),
A.P. State Financial Corporation v. Official Liquidator (supra), ICICI Bank
Ltd. v. SIDCO Leathers Ltd. and others [(2006) 10 SCC 452], Transcore v. Union
of India and another [(2008) 1 SCC 125] on which reliance has been placed by
learned counsel for the appellants and also a recent judgment in Union of India
v. SICOM Limited and another [(2009) 2 SCC 121]. In Allahabad Bank's case, a
two- Judge Bench was called upon to consider the question whether an
application can be filed under the Companies Act, 1956 during the pendency of
proceedings under the DRT Act. The facts of that case show that Allahabad Bank
filed an O.A. before the Delhi Bench of the DRT under Section 19. The same was
decreed on 13.1.1998. The debtor company filed appeal before DRAT, Allahabad.
Canara Bank also filed application under Section 19 before DRT, Delhi. During
the pendency of its application, Canara Bank filed Interlocutory Application
before the Recovery Officer for impleadment in the proceedings arising out of
O.A. filed by Allahabad Bank.
That application was
dismissed on 28.9.1998. In the auction conducted by the Recovery Officer, the
property of the debtor company was auctioned and the sale was confirmed.
Thereupon, Canara Bank filed applications under Section 22 of the DRT Act.
During the pendency of the applications, Canara Bank filed company application
in Company Petition No. 141 of 1995 filed by Ranbaxy Ltd. against M.S. Shoes
Company under Sections 442 and 537 of the Companies Act for stay of the
proceedings of recovery case No. 9/1998 instituted by the Allahabad Bank. By an
order dated 9.3.1999, the learned Company Judge stayed further sale of the
assets of the Company. Allahabad Bank challenged the order of the learned
Company Judge by filing petition for special leave to appeal. It was argued on
behalf of the appellant, i.e., Allahabad Bank that the DRT Act is a special
statute intended for expeditious adjudication and recovery of debts due to
banks and financial institutions and in view of Section 34(1) of that Act read
with sub-section (2) thereof, the company courts do not have jurisdiction to
entertain the application filed by the respondent- bank. It was argued on
behalf of the appellant that in view of the amendment made in Section 19(19) of
the DRT Act, only Section 529A of the Companies Act is attracted and that too
for a limited purpose, i.e., recovery of dues of the workmen.
On behalf of the
respondent-bank it was argued that during the pendency of the winding up
petition, the company court can pass appropriate order by entertaining an
application filed under Section 446 read with Section 537 of the Companies Act.
After noticing the
rival contentions, this Court framed six points for determination, first four
of which were:
"(1) Whether in
respect of proceedings under the RDB Act at the stage of adjudication for the
money due to the banks or financial institutions and at the stage of execution
for recovery of monies under the RDB Act, the Tribunal and the Recovery Officers
are conferred exclusive jurisdiction in their respective spheres? (2) Whether
for initiation of various proceedings by the banks and financial institutions
under the RDB Act, leave of the Company Court is necessary under Section 537
before a winding- up order is passed against the company or before provisional
liquidator is appointed under Section 446(1) and whether the Company Court can
pass orders of stay of proceedings before the Tribunal, in exercise of powers
under Section 442? (3) Whether after a winding-up order is passed under Section
446(1) of the Companies Act or a provisional liquidator is appointed, whether
the Company Court can stay proceedings under the RDB Act, transfer them to itself
and also decide questions of liability, execution and priority under Section
446(2) and (3) read with Sections 529, 529-A and 530 etc. of the Companies Act
or whether these questions are all within the exclusive jurisdiction of the
Tribunal? (4) Whether in case it is decided that the distribution of monies is
to be done only by the Tribunal, the provisions of Section 73 CPC and
sub-sections (1) and (2) of Section 529, Section 530 of the Companies Court
also apply -- apart from Section 529-A -- to the proceedings before the
Tribunal under the RDB Act?"
The Court referred to
various provisions of the DRT Act (in the judgment that Act was referred to as
"RDB Act") and Companies Act and held:
"21. In our
opinion, the jurisdiction of the Tribunal in regard to adjudication is
exclusive. The RDB Act requires the Tribunal alone to decide applications for
recovery of debts due to banks or financial institutions. Once the Tribunal
passes an order that the debt is due, the Tribunal has to issue a certificate
under Section 19 (22) [formerly under Section 19(7)] to the Recovery Officer
for recovery of the debt specified in the certificate. The question arises as
to the meaning of the word "recovery" in Section 17 of the Act. It
appears to us that basically the Tribunal is to adjudicate the liability of the
defendant and then it has to issue a certificate under Section 19(22). Under Section
18, the jurisdiction of any other court or authority which would otherwise have
had jurisdiction but for the provisions of the Act, is ousted and the power to
adjudicate upon the liability is exclusively vested in the Tribunal. (This
exclusion does not however apply to the jurisdiction of the Supreme Court or of
a High Court exercising power under Articles 226 or 227 of the Constitution.)
This is the effect of Sections 17 and 18 of the Act.
22. We hold that the
provisions of Sections 17 and 18 of the RDB Act are exclusive so far as the
question of adjudication of the liability of the defendant to the appellant
Bank is concerned."
The Court then
referred the recommendations of the Tiwari Committee and Narasimham Committee
regarding priorities of the secured creditors and held:
"Section 19(19)
is clearly inconsistent with Section 446 and other provisions of the Companies
Act. Only Section 529-A is attracted to the proceedings before the Tribunal.
Thus, on questions of adjudication, execution and working out priorities, the
special provisions made in the RDB Act have to be applied.
For the aforesaid
reasons, we hold that at the stage of adjudication under Section 17 and
execution of the certificate under Section 25 etc. the provisions of the RDB
Act, 1993 confer exclusive jurisdiction on the Tribunal and the Recovery
Officer in respect of debts payable to banks and financial institutions and
there can be no interference by the Company Court under Section 442 read with
Section 537 or under Section 446 of the Companies Act, 1956.
In respect of the
monies realised under the RDB Act, the question of priorities among the banks
and financial institutions and other creditors can be decided only by the
Tribunal under the RDB Act and in accordance with Section 19(19) read with
Section 529-A of the Companies Act and in no other manner. The provisions of
the RDB Act, 1993 are to the above extent inconsistent with the provisions of
the Companies Act, 1956 and the latter Act has to yield to the provisions of
the former. This position holds good during the pendency of the winding-up
petition against the debtor Company and also after a winding-up order is
passed. No leave of the Company Court is necessary for initiating or continuing
the proceedings under the RDB Act, 1993. Points 2 and 3 are decided accordingly
in favour of the appellant and against the respondents."
On the issue of the
workers' claim under Section 529A of the Companies Act, the Court
observed/held:
"61. The
respondent's contention that Section 19(19) gives priority to all "secured
creditors" to share in the sale proceeds before the Tribunal/ Recovery
Officer cannot, in our opinion, be accepted. The said words are qualified by
the words "in accordance with the provision of Section 529-A". Hence,
it is necessary to identify the above limited class of secured creditors who
have priority over all others in accordance with Section 529- A.
62. Secured creditors
fall under two categories. Those who desire to go before the Company Court and
those who like to stand outside the winding- up.
63. The first
category of secured creditors mentioned above are those who go before the
Company Court for dividend by relinquishing their security in accordance with
the insolvency rules mentioned in Section 529. The insolvency rules are those
contained in Sections 45 to 50 of the Provincial Insolvency Act.
Section 47(2) of that
Act states that a secured creditor who wishes to come before the official
liquidator has to prove his debt and he can prove his debt only if he
relinquishes his security for the benefit of the general body of creditors. In
that event, he will rank with the unsecured creditors and has to take his
dividend as provided in Section 529(2). Till today, Canara Bank has not made it
clear whether it wants to come under this category.
64. The second class
of secured creditors referred to above are those who come under Section
529-A(1)(b) read with proviso (c) to Section 529(1). These are those who opt to
stand outside the winding-up to realise their security. Inasmuch as Section
19(19) permits distribution to secured creditors only in accordance with
Section 529-A, the said category is the one consisting of creditors who stand
outside the winding up. These secured creditors in certain circumstances can
come before the Company Court (here, the Tribunal) and claim priority over all
other creditors for release of amounts out of the other monies lying in the
Company Court (here, the Tribunal). This limited priority is declared in
Section 529-A(1) but it is restricted only to the extent specified in clause
(b) of Section 529-A(1). The said provision refers to clause (c) of the proviso
to Section 529(1) and it is necessary to understand the scope of the said
provision."
43.
Similar
view was expressed in A.P. State Financial Corporation v. Official Liquidator
(supra). A learned Single Judge of the High Court allowed the applications
filed by the appellant under Section 446(1) of the Companies Act read with
Section 29 and 46 of the SFC Act subject to the condition that the appellant
would undertake to discharge its liability due to workers under Section 529A of
the Companies Act. While dismissing the appeal of the Corporation, this Court
held that non obstante clause contained in Section 529A of the Companies Act
being a subsequent enactment prevails over Section 29 of the SFC Act.
44.
The
judgment in Allahabad Bank's case was distinguished by a two-Judge Bench
judgment in ICICI Bank Ltd. v. SIDCO Leathers Ltd. and others (supra). In that
case the appellant and Punjab National Bank had advanced loans to respondent
no.1 for setting up a plant for manufacture of leather boards and for providing
working capital funds respectively. Respondent No. 1 created first charge in
favour of the appellant along with other financial institutions, i.e., IFCI and
IDBI by way of equitable mortgage by deposit of title deeds of its immovable
property. A second charge was created in favour of Punjab National Bank by way
of constructive delivery of title deeds, clearly indicating that the charge in
favour of the latter was subject to and subservient to charges in favour of
IFCI, IDBI and ICICI. On an application filed by respondent No.1, the Allahabad
High Court passed winding up order and appointed official liquidator. The
appellant filed suit for recovery of the amount credited to respondent No.1.
The said suit was transferred to the Debts Recovery Tribunal, Bombay. During
the pendency of proceedings before the Tribunal, official liquidator was
granted permission to continue in the proceedings in the suit. Punjab National
Bank filed a civil suit for recovery of money payable to it by respondent No.1.
While the proceedings were pending before the Tribunal and the Court of Civil
Judge, Fatehpur, the assets of the company were sold. The suit filed by Punjab
National Bank was decreed but the proceedings before the Tribunal remained
pending. After decree of the suit, the appellant along with IFCI and IDBI filed
an application before the Company Judge for consideration of their claim on pro
rata basis and also for exclusion of the claim of Punjab National Bank. The
learned Company Judge allowed the first prayer of the appellant but declined
the second one by relying upon the judgment in Allahabad Bank's case (supra).
The intra-court appeal was dismissed by the Division Bench by relying upon the
provisions of Section 529A. On further appeal, this Court referred to the
judgment in Allahabad Bank's case (supra) as also Rajasthan State Financial
Corporation v. Official Liquidator [(2005) 8 SCC 190] and held:
"Allahabad Bank
therefore, is not an authority for the proposition that in terms of Section
529-A of the Companies Act the distinction between two classes of secured
creditors does no longer survive. The High Court, thus, in our considered
opinion, was not correct in that behalf.
In fact in Allahabad
Bank it was categorically held that the adjudication officer would have such
powers to distribute the sale proceeds to the banks and financial institutions,
being secured creditors, in accordance with inter se agreement/arrangement
between them and to the other persons entitled thereto in accordance with the
priority in law.
Section 529-A of the
Companies Act no doubt contains a non obstante clause but in construing the
provisions thereof, it is necessary to determine the purport and object for
which the same was enacted.
In terms of Section
529 of the Companies Act, as it stood prior to its amendment, the dues of the
workmen were not treated pari passu with the secured creditors as a result
whereof innumerable instances came to the notice of the Court that the workers
may not get anything after discharging the debts of the secured creditors.
It is only with a
view to bring the workmen's dues pari passu with the secured creditors, that
Section 529-A was enacted.
The non obstante
nature of a provision although may be of wide amplitude, the interpretative
process thereof must be kept confined to the legislative policy. Only because
the dues of the workmen and the debts due to the secured creditors are treated
pari passu with each other, the same by itself, in our considered view, would
not lead to the conclusion that the concept of inter se priorities amongst the
secured creditors had thereby been intended to be given a total go-by.
A non obstante clause
must be given effect to, to the extent Parliament intended and not beyond the
same.
Section 529-A of the Companies
Act does not ex facie contain a provision (on the aspect of priority) amongst
the secured creditors and, hence, it would not be proper to read thereinto
things, which Parliament did not comprehend."
45.
In
Transcore v. Union of India (supra), a two-Judge Bench made detailed analyses
of the provisions of the DRT Act and formulated the following points for
consideration:- (i) Whether the banks or financial institutions having elected
to seek their remedy in terms of the DRT Act, 1993 can still invoke the NPA
Act, 2002 for realising the secured assets without withdrawing or abandoning
the OA filed before DRT under the DRT Act.
(ii) Whether recourse
to take possession of the secured assets of the borrower in terms of Section
13(4) of the NPA Act comprehends the power to take actual possession of the
immovable property.
(iii) Whether ad
valorem court fee prescribed under Rule 7 of the DRT (Procedure) Rules, 1993
is payable on an application under Section 17(1) of the NPA Act in the absence
of any rule framed under the said Act.
In dealing with the
afore-mentioned questions, the Court noticed the arguments of learned counsel
for the parties and proceeded to observe:- "Keeping in mind the above
circumstances, the NPA Act is enacted for quick enforcement of the security.
The said Act deals with enforcement of the rights vested in the bank/FI. The
NPA Act proceeds on the basis that security interest vests in the bank/FI.
Sections 5 and 9 of the NPA Act are also important for preservation of the
value of the assets of the banks/FIs. Quick recovery of debt is important. It
is the object of the DRT Act as well as the NPA Act. But under the NPA Act,
authority is given to the banks/FIs, which is not there in the DRT Act, to
assign the secured interest to securitisation company/asset reconstruction
company. In cases where the borrower has bought an asset with the finance of
the bank/FI, the latter is treated as a lender and on assignment the
securitisation company/asset reconstruction company steps into the shoes of the
lender bank/FI and it can recover the lent amounts from the borrower.
Therefore, when
Section 13(4) talks about taking possession of the secured assets or management
of the business of the borrower, it is because a right is created by the
borrower in favour of the bank/FI when he takes a loan secured by pledge,
hypothecation, mortgage or charge. For example, when a company takes a loan and
pledges its financial asset, it is the duty of that company to see that the
margin between what the company borrows and the extent to which the loan is
covered by the value of the financial asset hypothecated is retained. If the
borrower company does not repay, becomes a defaulter and does not keep up the
value of the financial asset which depletes then the borrower fails in its
obligation which results in a mismatch between the asset and the liability in
the books of the bank/FI. Therefore, Sections 5 and 9 talk of acquisition of
the secured interest so that the balance sheet of the bank/FI remains clean.
Same applies to immovable property charged or mortgaged to the bank/FI. These
are some of the factors which the authorised officer of the bank/FI has to keep
in mind when he gives notice under Section 13(2) of the NPA Act.
Hence, equity exists
in the bank/FI and not in the borrower.
Therefore, apart from
obligation to repay, the borrower undertakes to keep the margin and the value
of the securities hypothecated so that there is no mismatch between the asset-
liability in the books of the bank/FI. This obligation is different and
distinct from the obligation to repay. It is the former obligation of the
borrower which attracts the provisions of the NPA Act which seeks to enforce it
by measures mentioned in Section 13(4) of the NPA Act, which measures are not
contemplated by the DRT Act and, therefore, it is wrong to say that the two
Acts provide parallel remedies as held by the judgment of the High Court in
Kalyani Sales Co. As stated, the remedy under the DRT Act falls short as
compared to the NPA Act which refers to acquisition and assignment of the
receivables to the asset reconstruction company and which authorises banks/FIs
to take possession or to take over management which is not there in the DRT
Act. It is for this reason that the NPA Act is treated as an additional remedy
(Section 37), which is not inconsistent with the DRT Act."
The Court then
adverted to the concept of possession envisaged under Section 13(4) and held:
"The word
possession is a relative concept. It is not an absolute concept. The dichotomy
between symbolic an physical possession does not find place in the NPA Act.
Basically, the NPA Act deals with the mortgage type of securities under which
the secured creditor, namely, the bank/FI obtains interest in the property
concerned. It is for this reason that the NPA Act ousts the intervention of the
courts/tribunals. Section 13(4-A) refers to the word "possession"
simpliciter. There is no dichotomy in Section 13(4-A) as pleaded on behalf of
the borrowers.
The scheme of Section
13(4) read with Section 17(3) of the NPA Act shows that if the borrower is
dispossessed, not in accordance with the provisions of the NPA Act, then DRT is
entitled to put the clock back by restoring the status quo ante. Therefore, it
cannot be said that if possession is taken before confirmation of sale, the
rights of the borrower to get the dispute adjudicated upon are defeated by the
authorised officer taking possession. The NPA Act provides for recovery of
possession by non-adjudicatory process;
Therefore, to say
that the rights of the borrower would be defeated without adjudication would be
erroneous.
Rule 8 of the
Security Interest (Enforcement) Rules, 2002 ("2002 Rules") deals with
the stage anterior to the issuance of sale certificate and delivery of
possession under Rule 9. Till the time of issuance of sale certificate, the
authorised officer is like a Court Receiver under Order 40 Rule 1 CPC. The
Court Receiver can take symbolic possession and in appropriate cases where the
Court Receiver finds that a third-party interest is likely to be created overnight,
he can take actual possession even prior to the decree. The authorised officer
under Rule 8 has greater powers than even a Court Receiver as security interest
in the property is already created in favour of the banks/FIs. That interest
needs to be protected. Therefore, Rule 8 provides that till issuance of the
sale certificate under Rule 9, the authorised officer shall take such steps as
he deems fit to preserve the secured asset. It is well settled that
third-party interests are created overnight and in very many cases those third
parties take up the defence of being a bona fide purchaser for value without
notice. It is these types of disputes which are sought to be avoided by Rule 8
read with Rule 9 of the 2002 Rules. In the circumstances, the drawing of
dichotomy between symbolic and actual possession does not find place in the
scheme of the NPA Act read with the 2002 Rules."
The Court then
considered three provisos inserted in Section 19(1) of the DRT Act by amending
Act No.30 of 2004 and held that withdrawal of the OA pending before Tribunal
under the DRT Act is not a condition precedent for taking recourse to the
Securitisation Act.
46.
In
Union of India v. SICOM Limited and another (supra), this Court was called upon
to decide whether realization of the duty under the Central Excise Act will
have priority over the secured debts in terms of the SFC Act. The facts of that
case were that respondent no.2 borrowed a sum of Rs.51 lakhs from the first
respondent by an indenture of mortgage executed on 22.12.1986. Respondent No.2
also owed Rs.19 lakhs by way of central excise duty for the period April 1983
to May 1988. By a notification issued under Section 46(1) of the SFC Act, the
Government extended the provisions of Sections 27, 29, 30, 31, 32-A to 32-F, 41
and 41-A of the SFC Act in favour of the first respondent. Since respondent
no.2 defaulted in repayment of loan given by the first respondent, the latter
invoked Section 29 of the SFC Act and took physical possession of the mortgaged
assets. When the department expressed its intention to attach and seize the
properties of respondent no.2, the first respondent informed that it had first
charge over the mortgaged properties. In August 2000, the first respondent
issued a legal notice to the appellant and then filed a writ petition under
Article 226 of the Constitution of India in the Aurangabad Bench of the Bombay
High Court. The High Court considered the provisions of Rule 213(2) of the
Central Excise Rules read with Section 32(g) and Section 151 of the Maharashtra
Land Revenue Code, 1966 and held that as security of the corporation was prior
in point of time, the dues claimed by it will have priority over the dues of
customs. A two-Judge Bench of this Court referred to the non obstante clause
contained in Section 46B of the SFC Act and provisions of priority contained in
Section 529A of the Companies Act as also the provisions of EPF Act and the
Employees State Insurance Act, the judgments in Builders Supply Corporation v. Union
of India (supra), Bank of Bihar v. State of Bihar [(1972) 3 SCC 196], Dena Bank
v. Bhikhabhai Prabhudas Parekh & Co. (supra), Central Bank of India v. Siriguppa
Sugars & Chemicals Ltd. [(2007) 8 SCC 353], State Bank of Bikaner & Jaipur
v. National Iron & Steel Rolling Corporation and others (supra), ICICI Bank
Ltd. v. SIDCO Leathers Ltd. and others (supra) and approved the view taken by
the High Court.
47.
In
none of the afore-mentioned judgments this Court held that by virtue of the
provisions contained in the DRT Act or Securitization Act, first charge has
been created in favour of banks, financial institutions etc. Not only this, the
Court was neither called upon nor it decided competing priorities of statutory
first charge created under Central legislation(s) on the one hand and State
legislation(s) on the other nor it ruled that statutory first charge created
under a State legislation is subservient to the dues of banks, financial
institutions etc. even though statutory first charge has not been created in
their favour. The ratio of the judgment in Allahabad Bank's case (supra) is
that jurisdiction of adjudicatory mechanism established under the DRT Act is
exclusive and no other court or authority created under any other law can
interfere with the proceedings initiated by banks and financial institutions
for recovery of their dues. The other proposition laid down in that case which
appear to have been diluted by a co-ordinate bench in ICICI Bank's case is that
while distributing the money recovered by a bank or a financial institution,
priority given to the workers' dues in terms of Section 529A must be respected.
Section 11 of the Central Excise Act, which was considered by the two-Judge
Bench in SICOM's case, does not contain a provision similar to those in Central
legislations like Section 14A of the Workmen's Compensation Act, 1923, Section
11 of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of
the Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of
the Gift Tax Act, 1958 and Section 529A of the Companies Act, 1956, under which
statutory first charge has been created in respect of the dues of workmen or
gift tax etc.
48.
On
the basis of above discussion, we hold that the DRT Act and Securitisation Act
do not create first charge in favour of banks, financial institutions and other
secured creditors and the provisions contained in Section 38C of the Bombay Act
and Section 26B of the Kerala Act are not inconsistent with the provisions of
the DRT Act and Securitisation Act so as to attract non obstante clauses
contained in Section 34(1) of the DRT Act or Section 35 of the Securitisation
Act.
49.
Another
argument of some of the learned counsel for the appellants is that the prior
charge created in favour of the bank would prevail over the subsequent mortgage
created in favour of the State. Dr. Bishwajit Bhattacharyya, learned senior
counsel appearing for the Indian Overseas Bank heavily relied on the judgment
of three-Judge Bench in Dattatreya Shanker Mote and others v. Anand Chintaman
Datar and others (supra) and argued that the view expressed in the subsequent
judgments in State Bank of Bikaner & Jaipur v. National Iron & Steel
Rolling Corporation and others (supra) and R.M. Arunachalam v. Commissioner of
Income Tax, Madras [(1997) 7 SCC 698] requires reconsideration because the same
are based on misrepresentation of the judgment in Dattatreya's case. He pointed
out that Section 26B of the Kerala Act was inserted with effect from 1.4.1999
and argued that the same cannot prevail over the prior charge created in favour
of the bank in 1973 because the latter could not have had any notice of a
charge created in future. Other learned senior counsel referred to the
provisions of Sections 58, 69 and 100 of the Transfer of Property Act and
argued that the charge is not a mortgage although principles applicable to
simple mortgage also apply to a charge and, therefore, the State cannot claim
priority on the basis of non obstante clauses contained in Section 38C of the
Bombay Act or Section 26B of the Kerala Act and similar other State
legislations. They further argued that the provisions of the State Acts cannot
apply with retrospective effect so as to affect the right of banks and
financial institutions and other secured creditors to recover their dues from
the borrowers.
50.
Shri
Rakesh Dwivedi, learned senior counsel appearing for the State of Kerala argued
that statutory first charge created in favour of the State will have precedence
over a mortgage created in favour of bank etc. and the judgments in State Bank
of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and
others (supra) and R.M. Arunachalam v. Commissioner of Income Tax, Madras
(supra) do not require reconsideration. He pointed out that in Dattatreya's
case the Court was not dealing with statutory first charge whereas in the other
cases the Court had specifically dealt with such charge created in favour of
the State. Shri Dwivedi pointed out that Section 69 does not apply to a case
involving a secured creditor or Government. On the issue of retrospectivity,
the learned senior counsel submitted that from the date of insertion of Section
26B in the Kerala Act, the dues of sales tax became first charge over the
property of the borrower and the same would super- impose on the mortgage
created in favour of the bank. In support of this argument, he relied on the
judgments of K.S. Paripoornan v. State of Kerala and others [JT 1994 (6) SC 182
= (1994) 5 SCC 593] and Land Acquisition Officer v. B.V. Reddy and others
[(2002) 3 SCC 463].
51.
We
shall first refer to the judgment in Dattatreya's case. In that case, the
three-Judge Bench considered the question of priority between a charge created
by a decree and a subsequent simple mortgage. The appellants in that case filed
suit for recovery of Rs.1,34,000/- with interest from respondent Nos.1 to 7. On
March 31, 1941, a compromise decree was passed under which a charge was created
for the decretal amount on three pieces of property belonging to respondent
Nos. 1 to 7. The decree was registered on April 7, 1941, but due to
inadvertence the charge on Kakakuva Mansion at Poona was not shown in the index
of registration. On June 27, 1949, respondent Nos. 1 to 7 mortgaged Kakakuva
Mansion to plaintiff-respondent No. 14 for a sum of Rs.1,00,000/-. They also
created a further charge on September 13, 1949 in favour of
plaintiff-respondent no. 14 for Rs.50,000/-. On July 7, 1951, a charge was
created by a decree in favour of respondent No.15 for a sum of Rs.59,521/11/-.
In the meantime, the appellants recovered some amount by execution of the
decree. They sold the property at Shukrawar Peth at Poona and the chawl at
Kalyan. Thereafter, they filed a darkhast in the Court of the 3rd Joint Civil
Judge, Senior Division, Poona for sale of Kakakuva Mansion. Notices were issued
under Order 21 Rule 66 CPC to respondent no. 14 and others. Later on, the
executing court held that presence of plaintiff-respondent no.14 was not
necessary. The latter challenged that order in First Appeal No.668 of 1957
filed before the High Court of Bombay. He also filed a civil suit in the Court
of Joint Civil Judge, Senior Division, Poona for recovery of Rs.2,18,564/-
allegedly due to him under the two mortgages.
During the pendency
of that suit, the property was put up for sale on the darkhast of the
appellants, who themselves purchased the property with the leave of the Court.
As a sequel to this,
respondent no.14 impleaded the appellants as parties in suit no. 57 of 1958.
The appellants contested the suit on the ground that they had a prior charge
and the mortgage of respondent no. 14 was subject to that charge. The trial
Judge decreed the suit in favour of respondent no. 14. In appeal, the High
Court modified the decree of the trial Judge holding that as the mortgage in
favour of the respondent was protected under proviso to Section 100, it is free
from the charge created in favour of the appellants. The High Court also gave
priority to respondent no.15 for its dues, though it had not filed any appeal.
The majority judgment of the Court was delivered by Jaganmohan Reddy, J. who,
after noticing various provisions of the Transfer of Property Act, observed:
"A charge not
being a transfer or a transfer of interest in property nonetheless creates a
form of security in respect of immovable property. So far as mortgage is
concerned, it being a transfer of interest in property the mortgagee has always
a security in the property itself. Whether the mortgage is with possession or a
simple mortgage, the interest in the property enures to the mortgagee so that
any subsequent mortgage or sale always preserves the rights of the mortgagee
whether the subsequent dealings in the property are with or without notice.
The obvious reason
for this is that in a mortgage there is always an equity of redemption vested
in the owner so that the subsequent mortgagees or transferees will have, if
they are not careful and cautious in examining the title before entering into a
transaction, only the interest which the owner has at the time of the
transaction.
Insofar as competing
mortgagees are concerned, Section 48 of the Act gives priority to the first in
point of time in whose favour transfer of an interest in respect of the same
immovable property is created, if the interest which he has taken and the
interest acquired subsequently by other persons cannot all exist or be
exercised to their full extent together. This section speaks of a person who
purports to create by transfer at different times rights in or over the same
immovable property, and since charge is not a transfer of an interest in or
over the immovable property he gets no security as against mortgagees of the
same property unless he can show that the subsequent mortgagee or mortgagees
had notice of the existence of his prior charge."
52.
In
State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling
Corporation and others (supra), another Bench of three Judges considered the
effect of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 by which first
charge was created on the property of the dealer in lieu of the amount of tax,
penalty etc. on an existing mortgage on the property of the dealer. It is borne
out from the judgment that the appellant-bank had given cash credit facility to
respondent no.1. For securing repayment, respondent no.1 mortgaged the factory
premises in favour of the bank. In 1986, the appellant filed suit for recovery
of Rs.3,79,672/- with interest.
In that suit,
Commercial Taxes Officer got himself impleaded as party by asserting that State
had a prior claim for recovery of Rs.1,19,122/- as dues of sales tax. The
mortgaged property was sold by auction under the orders of the Court. The
Commercial Taxes Officer pleaded that the dues of sales tax should be paid
first out of the sale proceeds and the claim of the bank could be satisfied
only out of the balance amount. The trial Court upheld the claim of the
Commercial Taxes Officer.
The revision filed by
the bank was dismissed by the High Court. Before this Court it was argued that
the bank's claim will have precedence over the claim of the sales tax
authorities because mortgage in their favour was prior in point of time. After
noticing Section 11-AAAA of the Rajasthan Sales Tax Act which is pari materia
to Section 38C of the Bombay Act and Section 26B of the Kerala Act as also
Section 100 of the Transfer of Property Act and the judgment in Dattatreya's
case, the Court observed:
"Section 100 of
the Transfer of Property Act deals with charges on an immoveable property which
can be created either by an act of parties or by operation of law. It provides
that where immoveable property of one person is made security for the payment
of money to another, and the transaction does not amount to a mortgage, a
charge is created on the property and all the provisions in the Transfer of
Property Act which apply to a simple mortgage shall, so far as may be, apply to
such charge. A mortgage on the other hand, is defined under Section 58 of the
Transfer of Property Act as a transfer of an interest in specific immoveable
property for the purpose of securing the payment of money advanced or to be
advanced as set out therein. The distinction between a mortgage and a charge
was considered by this Court in the case of Dattatreya Shanker Mote v. Anand
Chintaman Datar [(1974) 2 SCC 799]. The Court has observed (at pages 806-807)
that a charge is a wider term as it includes also a mortgage, in that, every
mortgage is a charge, but every charge is not a mortgage. The Court has then
considered the application of the second part of Section 100 of the Transfer of
Property Act which inter alia deals with a charge not being enforceable against
a bona fide transferee of the property for value without notice of the charge.
It has held that the phrase "transferee of property"
refers to the
transferee of entire interest in the property and it does not cover the
transfer of only an interest in the property by way of a mortgage."
The Court then
considered the argument made on behalf of the bank that its dues will have
priority because at the time when the statutory first charge came into
existence, there was already a mortgage in respect of the same property and
held:- "The argument though ingenious, will have to be rejected. Where a
mortgage is created in respect of any property, undoubtedly, an interest in the
property is carved out in favour of the mortgagee.
The mortgagor is
entitled to redeem his property on payment of the mortgage dues. This does not,
however, mean that the property ceases to be the property of the mortgagor. The
title to the property remains with the mortgagor. Therefore, when a statutory
first charge is created on the property of the dealer, the property subjected
to the first charge is the entire property of the dealer. The interest of the
mortgagee is not excluded from the first charge. The first charge, therefore,
which is created under Section 11-AAAA of the Rajasthan Sales Tax Act will
operate on the property as a whole and not only on the equity of redemption as
urged by Mr. Tarkunde.
In the present case,
the section creates a first charge on the property, thus clearly giving
priority to the statutory charge over all other charges on the property
including a mortgage. The submission, therefore, that the statutory first
charge created under Section 11-AAAA of the Rajasthan Sales Tax Act can operate
only over the equity of redemption, cannot be accepted.
The charge operates
on the entire property of the dealer including the interest of the mortgagee
therein.
Looked at a little
differently, the statute has created a first charge on the property of the
dealer. What is meant by a "first charge"? Does it have precedence
over earlier mortgage? Now, as set out in Dattatreya Shankar Mote case a charge
is a wider term than a mortgage. It would cover within its ambit a mortgage
also.
Therefore, when a
first charge is created by operation of law over any property, that charge will
have precedence over an existing mortgage."
(Emphasis added)
53.
In
R.M. Arunachalam v. Commissioner of Income Tax, Madras (supra), the Court
reiterated the distinction between a charge and a mortgage in the context of
the provisions contained in Sections 53(1) and 74(1) of the Estate Duty Act,
1953, referred to the judgments in Dattatreya's case, State Bank of Bikaner
& Jaipur v. National Iron & Steel Rolling Corporation and others
(supra) and observed:
"A charge
differs from a mortgage in the sense that in a mortgage there is transfer of
interest in the property mortgaged while in a charge no interest is created in
the property charged so as to reduce the full ownership to a limited ownership.
The creation of a charge under Section 74(1) of the Estate Duty Act cannot,
therefore, be construed as creation of an interest in property that is the
subject-matter of the charge. The creation of the charge under Section 74(1)
only means that in the matter of recovery of estate duty from the property
which is the subject-matter of the charge the amount recoverable by way of
estate duty would have priority over the liabilities of the accountable person.
In that sense the claim in respect of estate duty would have precedence over
the claim of the mortgagee because a mortgage is also a charge. The High Court
has, therefore, rightly held that as a result of the charge created under
Section 74(1) of the Estate Duty Act, it could not be said that title of the
assessee to the immovable properties received by him from Smt Umayal Achi was
incomplete and imperfect in any way. In the context of the facts, the High
Court has found that the assessee had admittedly become the full owner of the
assets even before the payment of estate duty and on payment of the same he had
not acquired a new right, tangible or intangible, in the assets. It cannot,
therefore, be said that the amount proportionate to estate duty paid by the
assessee on the properties that were transferred should be treated as
"cost of acquisition of the assets" under Sections 48 and 49 read
with Section 55(2) of the IT Act. Since the title of the assessee to the
immovable properties acquired was not incomplete and imperfect in any way, it
cannot also be said that as a result of the payment of the estate duty by the
assessee there was an improvement in the title of the assessee and the said
payment could be regarded as "cost of improvement" under Section 48
read with Section 55(1)(b) of the Act."
54.
In
our opinion, the judgments in State Bank of Bikaner & Jaipur v. National
Iron & Steel Rolling Corporation and others (supra) and R.M. Arunachalam v.
Commissioner of Income Tax, Madras (supra) are based on a correct reading of
the ratio of the Dattatreya's case and the propositions laid down therein do
not call for reconsideration. At the cost of repetition, we consider it
appropriate to observe that in Dattatreya's case the Court was not dealing with
the statutory first charge created in favour of the State.
55.
The
argument of learned counsel for the appellants that the State legislations
creating first charge cannot be given retrospective effect deserves to be
negatived in view of the judgment in State of M.P. and another v. State Bank of
Indore (supra). In that case, it was held that the charge created in favour of
the State under Section 33C of the Madhya Pradesh General Sales Tax Act, 1958
in respect of the sales tax dues prevail over the charge created in favour of
the bank in respect of the loan taken by 2nd respondent and the amendment made
in the State operates in respect of charges that are in force on the date of
introduction of Section 33C.
56.
We
shall now deal with the individual cases.
57.
C.A.
No. 95/2005 Central Bank of India v. State of Kerala and others - The facts of
the case have been set out in the earlier part of the judgment.
A recapitulation
thereof shows that suit filed by the appellant bank in 1996 for recovery of its
dues was, later on, transferred to the Tribunal and decreed on 1.12.2000.
Before that the Tehsildar, Mavelikara had attached the properties of the
borrower on 2.2.2000 and again on 4.9.2000 for recovery of the arrears of sales
tax.
The bank challenged
the notice issued by Tehsildar for recovery of the arrears of sales tax but
could not persuade the learned Single Judge who held that in view of Section
26B of the Kerala Act, dues of the State will have priority. The order of the
learned Single Judge was approved by the Division Bench. In our opinion, the
view taken by Kerala High Court is in consonance with what we have held in the
earlier part of the judgment regarding primacy of the State's first charge over
the dues of banks, financial institutions and secured creditors. Therefore, the
impugned orders do not call for any interference.
58.
C.A.
No.2811/2006 - The Thane Janata Sahakari Bank Ltd. vs. The Commissioner of
Sales Tax & Others - In this case the bank had taken possession of the
mortgaged assets on 15.2.2005 and sold the same. On 11.7.2005, the officers of
the Commercial Tax Department informed the bank about outstanding dues of sales
tax amounting to Rs. 3,62,82,768/-. The Assistant Commissioner issued notice
under Section 39 of the Bombay Act for recovery of Rs.48,48,614/-. The High
Court negatived the bank's claim of priority and held that Section 35 of the
Securitisation Act does not have overriding effect over Section 33C of the
Bombay Act. The view taken by the High Court is unexceptional and calls for no
interference.
59.
C.A.
No.3549/2006 - Indian Overseas Bank vs. Kerala State and Others - Respondent
no.3 in this appeal, namely, Cheruvathur Brothers, Chalissery, Palakkad
District availed various credit facilities from the appellant-bank and created
mortgage in latter's favour for securing repayment. On 11.2.1994, Deputy
Tehsildar (RR), Ottapalam (Kerala) requested the bank to furnish details of the
properties mortgaged by respondent no.3 by stating that action was to be
initiated under the Kerala General Sales Tax Act and the Kerala Revenue Recovery
Act for recovery of the arrears of sales tax. The bank claimed that it was a
secured creditor and had a prior charge over the mortgaged properties.
Thereafter, recovery proceedings were initiated by Deputy Tehsildar. The bank
filed suit for injunction bearing OS No.133/1994 with the prayer that State of
Kerala and Deputy Tehsildar (RR), Ottapalam be restrained from attaching and
selling the mortgaged property as described in the schedule attached with the
plaint. The bank filed another suit against respondent no.3 and 4 for recovery
of its dues. On the establishment of Chennai Bench of Tribunal, the second suit
was transferred and numbered as T.A. No.1284/1997. By an order dated
31.12.1998, the Tribunal allowed the application of the bank and issued recovery
certificate for a sum of Rs.23,80,430.95. Thereafter, Recovery Officer, DRT,
Chennai issued notice dated 6.10.1999 to respondent nos.3 to 5 to pay the dues
of bank in terms of the decree passed by the Tribunal.
60.
The
suit for injunction filed by the bank was dismissed by Sub Judge, Ottapalam
vide judgment dated 21.12.1999. The trial Court held that the plaintiff has not
produced any evidence to show that it had got a mortgage from defendant no.3
and on that premise the bank's plea for injunction was negated. Appeal Suit
No.177/2000 filed by the bank was dismissed by the learned Single Judge of the
High Court vide judgment dated January 19, 2005. Further appeal preferred by
the bank was dismissed by the Division Bench of the High Court on 12.7.2005 by
relying upon the judgment of the Full Bench of the High Court in Kesava Pillai
vs. State of Kerala [2004 (1) KLT 55] by observing that the appeal is not
maintainable. In our opinion, the bank cannot claim priority over the dues of
sales tax because statutory first charge had been created in favour of the
State by Section 26B which was inserted in the Kerala Act with effect from
1.4.1999 and the courts below did not commit any error by refusing to decree
the suit for injunction filed by the bank.
61.
C.A.
No.3973 of 2006 -- Bank of Baroda vs. State of Kerala and others - The
appellant-bank extended the loan facilities to respondent no.2 - M/s. Eastern
Cashew Company. Respondent No.3, Mrs. Meena Vasanth gave guarantee and
mortgaged immovable property to secure the dues of the bank. On account of the
borrower's failure to repay the loan amount, the bank filed O.S. No. 133/86 in
the Court of Sub Judge, Kollam. The same was decreed on 23.3.1993. The judgment
of the trial Court was challenged by the borrower in A.S. No. 229/1994.
Notwithstanding this,
the bank filed Execution Petition No. 159/1994 for execution of the decree.
During the execution proceedings, Tehsildar, Kollam issued notice to respondent
no.3 under Section 49(2) of the Kerala Revenue Recovery Act for payment of
arrears of sales tax amounting to Rs.1,19,86,461/-. He also indicated that 41.80
acres of land in revenue survey no. 680/2 will be sold for realization of sales
tax dues. The borrowers challenged the notice by filing writ petitions in the
High Court, which were dismissed on 13.10.2005 and it was held that the State
authorities were free to take action under the Kerala Act. Thereafter, the bank
filed Writ Petition No.7464/2006, questioning the notice issued by the
Tehsildar under Kerala Revenue Recovery Act. The learned Single Judge dismissed
the writ petition by observing that sale was being conducted under the Revenue
Recovery Act pursuant to the judgment of the Court. Writ Appeal No.538/2006 was
dismissed by the Division Bench by placing reliance upon the judgment in South
Indian Bank Limited vs. State of Kerala [2006 (1) KLT 65] in which the
following view was expressed:
"Right of the
State to have priority in the matter of recovery of sales tax from the
defaulters over the equitable mortgages created by them in favour of Banks and
Financial Institutions is no more res integra. Dealing with the provisions
parallel to Section 26B of the Kerala General Sales Tax Act by the various
Sales Tax Laws of other States, Supreme Court has already recognized the
statutory first charge in respect of sales tax arrears. Reference may be made
to the decisions of the Apex Court in State Bank of Bikaner & Jaipur v.
National Iron & Steel Rolling Corporation and Ors. (1995) 96 STC 612),
Delhi Auto and General Finance Pvt. Ltd. v. Tax Recovery Officer and Ors.
(1999) 114 STC 273), Dattatreya Shanker Mote v. Anand Chintaman Datar, Dena
Bank v. Bhikhabhai Prabhudas Prakash Co. and various other decisions. We may
refer to the latest decision of the Apex Court in State of M.P. v. State Bank
of Indore, wherein the court examined the charge created under Section 33C of
the M.P. General Sales Tax Act, 1958 and held that Section 33C creates a
statutory first charge that prevails over any charge that may be in existence.
The Court held that the charge thereby created in favour of the State in
respect of the sales tax dues of the second respondent prevailed over the
charge created in favour of the Bank. Judicial pronouncements settled the law
once for all stating that State has got priority in the matter of recovery of
debts due and the specific statutory charge created under the Sales Tax Act
notwithstanding the equitable mortgages created by the defaulters in favour of
the Banks prior to the liability in favour of the State. A Division Bench of
this Court in Sherry Jacob v. Canara Bank, held that revenue recovery
authorities shall have the liberty to proceed against the property of the
company under the Revenue Recovery Act on the strength of the first charge
created over the property by virtue of Section 26B of the Kerala General Sales
Tax Act. The Court held that the statutory first charge would prevail over any
charge or right in favour of a mortgage or secured creditors and would get
precedence over an existing mortgage right.
We are in this case
concerned with the question as to whether Section 26B of the K.G.S.T. Act would
take away the efficacy of a decree passed by the civil court prior to the
introduction of said section. We are of the view till the decree is executed
through executing court title of the mortgaged property remains with the
mortgagor. Decree passed by the civil court is the formal expression of an
adjudication which conclusively determines the rights of parties, but unless
and until the decree is executed the Bank would not procure the property and
the State's overriding rights would have precedence over that of the Bank. When
a first charge created by the operation of law over any property, that charge
will have precedence over an existing mortgage and the decree obtained by the
bank against the mortgagor will not affect the State since State was not a
party to the suit. Decree has only conclusively determined the rights between
the mortgagor and mortgagee which would not affect the statutory rights of the
State.
The expression
"rights of parties" used in Section 2(2) means rights of parties to
the suit. State which has got a statutory first charge under Section 26B of the
K.G.S.T. Act would prevail over the rights created in favour of the Bank by an
unexecuted decree.
We therefore hold
that the decree obtained by the Bank will not have any precedence over the
first charge created in favour of the State under Section 26B of the K.G.S.T.
Act."
In our opinion, the
High Court has rightly held that the first charge created by Section 26B of the
Kerala Act will have primacy over the bank's dues.
62.
C.A.
No.4174/2006 -Ahmad Koya, Kollam v. The District Collector, Kolam & others
- In 1974, respondent no.7, Thomas Stephen and Company, Kollam took loan from
Canara Bank. The company mortgaged two of its properties by deposit of title
deeds as a continuing collateral security. On 24.8.1992, the bank filed suit
for recovery of its dues. On creation of bench of the Tribunal at Cochin, the
suit was transferred to the Tribunal, which passed decree dated 17.2.2000 for a
sum of Rs.41,25,451.64 with interest at the rate of 15% per annum from
24.8.1992. On 24.8.2000, the bank obtained recovery certificate against the
company. In the meanwhile, Tehsildar (Revenue Recovery) issued notice dated
18.7.2000 under Section 46 of the Kerala Revenue Recovery Act and attached the
property of the company in lieu of the dues of sales tax. He then issued notice
dated 13.2.2001 under Section 49 of the Kerala Revenue Recovery Act for sale of
the property. The bank filed Writ Petition (OP No.8845 of 2001) for quashing
the sale notice. By an interim order, the High Court stayed all proceedings
pursuant to the sale notice issued by the Tehsildar. Thereafter, the bank
initiated proceedings for execution of decree dated 17.2.2000. As a sequel to
this, the mortgaged properties were put to sale. In the auction held on
31.1.2003, the petitioner gave bid of Rs.60,60,010/- for the first property
admeasuring 40 cents with building thereon. The second property was not put to
auction apparently because the bid given by the appellant satisfied the bank's
claim. On 14.2.2003, the petitioner deposited the bid amount. He was in
possession of the auctioned property excluding the area of 8.50 cents which was
in the possession of the 8th respondent, Sherry Jacob as licensee. At that
stage, the State Government filed Writ Petition No.26523 of 2003 for quashing
the sale proceedings and also for issue of a direction to the auction purchaser
to hand over the possession of the property to the revenue officer for
conducting fresh auction for realization of the arrears of sales tax. The
appellant also filed Writ Petition No.27302 of 2003 for restraining the revenue
officer from taking action against the auctioned property.
During the pendency
of the writ petition, the company was wound up. By an order dated 10.11.2004,
the Division Bench of the High Court disposed of Writ Petition Nos.26523 of
2003 and 27302 of 2003 along with Writ Appeal Nos.1165 of 2003 and 1230 of 2003
filed by the company and licensee against dismissal of the writ petitions filed
by them challenging the sale conducted by the recovery officer of the Tribunal.
The Division Bench
referred to Section 26B of the Kerala Act, judgments of this Court in State
Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation and
others (supra) and State of M.P. v. State Bank of Indore (supra) and held that
the sale conducted by the recovery officer of the Tribunal is illegal because
no notice was given to the revenue officers despite the fact that the property
which was subjected to auction had already been attached. The Division Bench
further held that the State was entitled to enforce the first charge on the
property of the company by conducting fresh auction. The Review Petition filed
by the appellant was dismissed by another Division Bench by recording the
following observations:- "We have already found that the various
provisions of the Recovery of Debts due to Banks and Financial Institutions
Act, 1993 would not affect the statutory charge of the State Government.
Therefore the contention raised on the basis of the Second Schedule to the
Income Tax Act, 1961 need not be examined. Since we have already found that
State Government stands outside the purview of the DRT Act and that the State
need not stand in the queue for claiming priority, the contention of the
counsel for the review Petitioners that the sale effected by State is vitiated
cannot be sustained.
We therefore find no
reason to accept the contention raised by senior counsel. We also find no
substance in the arguments raised by the counsel for the Canara Bank.
Contentions raised by the counsel are only to disturb the substantial right of
the State which has already been recognized by the Division Bench holding that
they have got first charge and the State can adopt its own procedure for
enforcing the statutory charge. Procedural provision pointed out by the counsel
have no relevance while the State is enforcing the statutory charge. Regarding
the contention raised by senior counsel Sri N.N. Sugunapalan we are of the
view, if any amount is due towards employees provident fund those matters could
be taken up before the State Government. The power under Section 11(2) would
not annul the statutory charge of the State. Under such circumstance review
petitions would stand dismissed." Ms. Indu Malhotra, learned counsel for
the appellant argued that decree passed by the Tribunal on 17.2.2000 was prior
to the notice for attachment issued by Tehsildar under Section 36 of the Kerala
Revenue Recovery Act and as the sale notice issued by him was stayed by the
High Court on 15.3.2001, the bank did not commit any illegality by auctioning
the first property of the company. She further argued that State can recover its
dues by auctioning the second property of the company and the High Court was
not justified in nullifying the auction conducted by the recovery officer of
the Tribunal. Learned counsel appearing for the bank argued that since the
State was not a party before the Tribunal, it was not necessary to give notice
to the Tehsildar.
In our view, the High
Court did not commit any illegality by nullifying the auction conducted by the
recovery officer of the Tribunal, who, as per admitted factual matrix of the
case, did not give notice to the revenue officer despite the fact that the
property had been attached under Section 36 of the Kerala Revenue Recovery Act
and the bank had challenged the notice issued under Section 49(2) of that Act
in Writ Petition No.8845 of 2001 and succeeded in persuading the High Court to
stay that notice.
63.
C.A.
No.4909 of 2006 - Central Bank of India v. The Deputy Tehsildar and others -
The petitioner-bank extended financial facilities to the private respondents,
who mortgaged immovable properties for securing repayment. In 1994, the bank
filed suits for recovery of its dues. On establishment of the bench of the
Tribunal at Ernakulam, all the suits were transferred to the Tribunal which
passed decree dated 31.3.2000 in T.A. No.1032/1997, 25.7.2001 in T.A.
No.1009/1997 and 9.8.2001 in T.A. No.1015/1997. The bank also issued recovery
certificate dated 1.12.2003. However, before the bank could execute the
decrees, Tehsildar (Revenue Recovery), Kollam, initiated proceedings under the
Kerala Revenue Recovery Act for sale of the mortgaged properties which was
attached for recovery of the arrears of sales tax. The petitioner challenged
the sale notices issued by Tehsildar in Writ Petition No.13425 of 2004. The
learned Single Judge by relying on the judgment of this Court in Dena Bank v.
Bhikabhai Prabhudas Parekh & Co. (supra) and of the Division Bench of the
High Court in Sherry Jacob v. Canara Bank [2004 (30) KLT 1089] dismissed the
writ petition. The Division Bench dismissed the writ appeal.
In our opinion, the
High Court rightly held that the Tehsildar was entitled to give effect to the
primacy of statutory first charge created on the property of the dealer under
Section 26B of the Kerala Act.
64.
C.A.
No.1288 of 2007 - UCO Bank v. State of Kerala & others - Respondent No.4,
M/s. International Trade Links took loan from the appellant-bank but failed to
repay the same. The appellant issued notice under Section 13(2) of the
Securitisation Act and approached Tehsildar (Revenue Recovery) Kanayannur for
rendering assistance to take possession of the mortgaged property. The latter
declined the appellant's request on the ground that action has already been
initiated under the Kerala Revenue Recovery Act for recovery of sales tax under
the Kerala Act. Thereupon, the appellant filed Writ Petition No.4198 of 2005
for issue of a direction to the District Collector, Ernakulam and Tehsildar,
Kanayannur to take vacant possession of the mortgaged property. It also prayed
that Section 26A and 26B of the Kerala Act be declared unconstitutional and
void being inconsistent with the provisions of the Securitisation Act. By an
order dated 7.2.2005, the learned Single Judge directed the Tehsildar to sell
mortgaged property and to permit the bank to coordinate in the sale. That order
was modified on 22.9.2005 and the bank was allowed to sell the property subject
to certain conditions. The bank applied for modification of order dated
22.9.2005 and prayed that it may be permitted to retain the money realized from
sale of the mortgaged property. The learned Single Judge did not entertain the
appellant's prayer but directed that if the sale price is lower than the one
mentioned by the government pleader then the sale shall be confirmed only after
getting further order from the court. Liberty was also given to the
borrower/guarantor to pay the arrears. Writ appeal filed by the appellant-bank
against the interim order was disposed of by the Division Bench with the
following observations:- "Since the revenue authorities have already
attached the property this court will not be justified in directing respondents
2 and 3 to hand over possession of the property to the Bank. All the same it is
entirely for the State and its officers to decide whether possession should be
handed over to the Bank for taking further proceedings under the Securitisation
Act. We leave it to the State to take a decision in this matter in accordance
with law. Needless to say, since State has got prior charge it is open to the
State to proceed in accordance with law. Let a decision be taken by the
district Collector within one month from the date of receipt of a copy of this
judgment. The appeal and the writ petition are disposed of as above. I.A.
No.14420 of 2005 would stand dismissed."
Since we have already
expressed the view that in terms of Section 26B of the Kerala Act, the State
has got prior charge over the property of the dealer and the facts of the case
show that the revenue authorities had already attached the property, there is
no valid ground to interfere with the order passed by the Division Bench.
65.
C.A.
No.1318 of 2009 [arising out of S.L.P. (C) No.24767 of 2005] - The South Indian
Bank Ltd., Trichur -1 v. State of Kerala & others - In the year 1984, the
appellant-bank granted loan to respondent nos.3 to 5, who mortgaged their
immovable properties as security for repayment. After 8 years, the bank filed
O.S. No.720 of 1992 for recovery of amount of loan with interest. The suit was
decreed on 30.1.1995 for a sum of Rs.3,51,36,973/-. After lapse of three years,
the bank filed O.A. No.1081 of 1998 for recovery of the amount in terms of
decree dated 30.1.1995. On 26.7.2000, the Tribunal issued recovery certificate
in favour of bank.
In the meanwhile,
Tehsildar, Ottapalam issued notice under Section 49(2) of the Kerala Revenue
Recovery Act on 2.6.1999 for sale of the mortgaged properties for recovery of
sales tax dues amounting to Rs.85,45,276/-. The appellant challenged the
proposed sale in Writ Petition (O.P. No.17701 of 1999) and prayed that the
State and its functionaries may be restrained from selling the property. The
learned Single Judge, after noticing the judgment of this Court in State of
M.P. v. State Bank of Indore [(2002) 10 KTR 366 (SC)] held that even if there
is first charge in favour of the bank, the same will not adversely affect the
statutory first charge of the State.
Accordingly, he
refused to interfere with the proposed sale of the mortgaged properties but
gave liberty to the bank to proceed to execute the decree passed in its favour
in accordance with law. Writ appeal filed by the bank was dismissed by the
Division Bench making observations which have been extracted hereinabove.
66.
We
are in complete agreement with the Division Bench that statutory first charge
created in favour of the State under Section 26B of the Kerala Act has primacy
over the right of the bank to recover its dues.
67.
In
the result, the appeals are dismissed. However, it is made clear that this
judgment shall not preclude the banks from realising their dues by taking
recourse to other proceedings, as may be permissible under law. The appellant
in Civil Appeal No.4174 of 2006 shall be free to avail appropriate remedy for
refund of the amount deposited by him in furtherance of the auction conducted
by the recovery officer.
......................J.
[B.N. AGRAWAL]
......................J.
[G.S. SINGHVI]
......................J.
[AFTAB ALAM]
New
Delhi,
February
27, 2009.
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