SARFAESI | DRI Can't Prevent Secured Creditors From Recovering Dues Citing Probe Against Debtor Under Customs Act: Bombay High Court

The Bombay High Court recently held that a secured creditor cannot be prevented from recovering its dues from assets of the debtor under the SARFAESI Act on the ground that the debtor is under investigation for violation of Customs Act.A division bench of Justice GS Kulkarni and Justice Firdosh P Pooniwalla quashed a letter from the Directorate of Revenue Intelligence (DRI) to Bank of Maharashtra ordering it to not take any action on the debtor's property without consulting the DRI.“it would be clear that the recovery as initiated by the petitioner under the SARFAESI Act cannot be impeded by the respondents (DRI) by taking recourse to Section 142A of the Customs Act. The reason being that Section 142A itself is a provision which saves the provisions of the SARFAESI Act under which the action was resorted by the petitioner to recover its dues from respondent No. 2. In any event, it is well settled that unless there is a preference given to a Crown debt by a statute, the dues of a secured creditor like the petitioner would have preference over Crown debts”, the court observed.The petitioner, Bank of Maharashtra, had extended secured credit facilities to Arowana Sports Pvt. Ltd., who subsequently defaulted on payments. Following the declaration of its account as a Non-Performing Asset (NPA) in August 2015, the petitioner-bank initiated proceedings under section 14 of the SARFAESI Act to recover the dues. However, the DRI issued a letter telling the petitioner not to take any action on the property documents of the debtor without consulting DRI until the completion of ongoing investigations related to smuggling and money laundering. Thus, the bank approached the High Court in the present writ petition.The bank contended that the directive from DRI impeded its rights as a secured creditor under the SARFAESI Act.DRI did not dispute the contents of the letter but justified it based on ongoing investigations involving the debtor and other entities mentioned in the letter.The court observed that while Section 142A of the Customs Act provides that any amount payable under this Act shall be the first charge on the property of an assessee, this provision has a saving clause giving an exception to the SARFAESI Act. Section 142A of the Customs Act, which could be the only source of power of the DRI to issue the impugned communication, is subject to the SARFAESI Act, the court noted. Further, section 35 of the SARFAESI Act gives it overriding effect on other legislations, the court added. The court highlighted that the petitioner's actions were initiated under the SARFAESI Act, a special law for debt recovery, and thus should not be impeded by Section 142A of the Customs Act.The court further cited various previous judgments and reiterated that dues of a secured creditor have priority over DRI's claim as per the SARFAESI Act.The court quashed the impugned letter issued by DRI, allowing the bank to proceeding with its actions against the debtor and the secured assets under the SARFAESI Act. The court kept open all contentions of DRI regarding any recovery it may have against the entities mentioned in the impugned letter.Advocate Sarthak Utangale represented the Petitioner-bank. Advocates Jitendra B Mishra and Dhananjay Deshmukh represented DRI.Case no. – Writ Petition No. 386 of 2023Case Title – Bank of Maharashtra. v. Directorate of Revenue Intelligence and Anr.Click Here To Read/Download Judgment

SARFAESI | DRI Can't Prevent Secured Creditors From Recovering Dues Citing Probe Against Debtor Under Customs Act: Bombay High Court

Amisha Shrivastava

The court reiterated that SARAESI Act has an overriding effect, and dues of secured creditor have priority over other dues.

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