Secured Creditor Registered With CERSAI Will Have Precedence Over VAT Authorities Against Proceeds Of Enforcement: Bombay HC

The Bombay High Court recently clarified that in a sale of a mortgaged asset, where the mortgage in favour of a secured creditor is registered prior in time with CERSAI, and the MVAT Authorities too have a charge, the proceeds of the enforcement of the mortgage would first go towards discharging the dues owed to the secured creditor. It is only the residue, if any, after discharging the dues of the mortgagee, that may flow to the MVAT Authorities, added the Court. The High Court therefore held that once a secured creditor registers its security interest u/s 26-B of the SARFAESI Act notwithstanding any other law in force, the debts owed to the secured creditor shall be paid in priority over all other debts including taxes payable to the State Government. A Division Bench of Justice Somasekhar Sundaresan and Justice B.P. Colabawalla observed that “The only effect of the interplay between Section 26-E of the SARFAESI Act and Section 37 of the MVAT Act would be that MVAT Authorities would not have priority in the recourse to the assets that are secured in favour of the secured creditor and registered in priority with CERSAI”. (Para 26) As per the brief facts of the case, the Borrower (Respondent No.3 - Savair Energy Ltd) availed of credit facilities from a consortium of banks led by the Petitioner. Various loan and security documents were executed among them from time to time. The security interest of these secured creditors included a mortgage over land, along with factory and other construction thereon (collectively known as secured assets), situated at Mumbai. The mortgage over the Secured Assets was registered under Section 26-B of the SARFAESI Act with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) in 2014. In the year 2018, the Borrower's account was classified as a non-performing asset owing to defaults in payment of the dues owed to the consortium. Later, a demand notice under Section 13(2) of the SARFAESI Act was issued by the Petitioner, claiming a total indebtedness of Rs. 35.31 crores and then also took symbolic possession of the Secured Assets. The Petitioner eventually filed an application under Section 14 of the SARFAESI Act, before the District Magistrate, who passed an order directing the Tahsildar to take physical possession of the Secured Assets. Physical possession was eventually taken by the Petitioner and attempts were made to sell the Secured Assets by way of e-auction. Meanwhile, the MVAT Authorities proceeded to recover tax dues allegedly owed by the Borrower – first from the Borrower, and later from the Petitioner. Pursuing recovery from the Petitioner, the MVAT Authorities asserted that they have a statutory first charge over the Secured Assets and the charge of any secured creditor over mortgaged assets would have to yield to such statutory first charge. In the said process, the MVAT Authorities called upon the Petitioner not to auction the Secured Assets, and asserted that if any amounts were to be recovered, the proceeds should first be appropriated towards sales tax dues in full. A demand notice was also issued under Section 32 of the MVAT Act asking the Petitioner to pay Rs. 16.60 crores towards sales tax dues of the Borrower within 30 days, failing which, the same would be recovered as arrears of land revenue from the Petitioner. The Bench referred to the provision of Section 26-E of the SARFAESI Act, to observe that secured creditors and officials enforcing recovery of tax may register their security interest and attachment orders respectively with CERSAI. The Bench explained that such registration is a constructive public notice of the charge over the property in question, and the registrant with a prior registration would have priority over subsequent registrants, and without such registration, the secured creditor shall not have the right to take enforcement action under the SARFAESI Act. The Bench went on to observe that nearly five years before the MVAT Authorities passed the very first adjudication order demanding tax, and nearly seven years before the first attachment order was passed, the mortgage in favour of the Petitioner-led consortium of banks had been created and registered with CERSAI. “Such prior registration accorded the Petitioner-led consortium the entitlement to priority under Section 26-C(2) of the SARFAESI Act, read with Section 26-E, no sooner than these provisions were brought into force on 24th January, 2020”, added the Bench. The Bench also explained that while Section 37(1) of the MVAT Act would override any provision of contract that creates a charge, it would be subservient to any provision in a Central Act that gives first charge to some other entity. Section 26-E of the SARFAESI Act, is evidently a provision in a Central Act that gives first priority to secured creditors, subject to such...

Secured Creditor Registered With CERSAI Will Have Precedence Over VAT Authorities Against Proceeds Of Enforcement: Bombay HC

Pankaj Bajpai

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