Sale Of Property Under SARFAESI Will Not Extinguish Prior Existing Charge For Dues Under State Tax Laws : Kerala High Court

The Kerala High Court on Friday held that the statutory charge created under the provisions of the Kerala General Sales Tax Act, 1963 and the Kerala Value Added Tax Act, 2003, prior to any mortgage made, against the dealers would remain intact, even if the property is sold by the Bank, by the rights conferred under Section 26E of the SARFAESI Act, 2002, and Section 31B of the Recovery of Debts and Bankruptcy Act 1993 read with the Rules to it, until such encumbrances are cleared as per the provisions of the said enactments and the rules. The Division Bench comprising Chief Justice S. Manikumar and Justice Shaji P. Chaly, passed the above orders in a batch of writ appeals filed by the State challenging the Single Bench order which held that a secured creditor under Section 26E of the SARFAESI Act and Section 31B of the RDB Act obtains priority over the right claimed by the Revenue, both in proceeding against the properties in question, or in recovering the secured debt.While allowing the writ appeals, the Division Bench observed:"To put it otherwise, if and when any amounts have fallen due as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003 and the proceedings start, consequent to which a charge is created on the properties of the assessee and the said charge created would continue to run with the property even if the Banks / financial institutions conduct the sale to recover the amounts due under the mortgage". It noted that,"....if the mortgage is created after the amounts have fallen due as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003 and accordingly, proceedings are initiated, such a mortgage can only be termed as subject to a statutory charge as per Sections 26B and 38 of Act 1963 and the Act 2003 respectively". The Court had perused the scheme of the SARFAESI Act and the RDB Act, and the parliamentary discussions to the amendments of the two legislations, and observed, "...from the discussions and deliberations what we could gather was only as to how the Bank has to be paid first the amounts due to it under a mortgage. Therefore under no circumstances it can be legally presumed that the parliament ever thought of realizing the amounts due under a mortgage giving an absolute go by to the statutory charge created by the Central and State enactments. That apart since Section 26E makes it clear that the Bank is entitled only for a priority in payment alone, it can never be said to be a charge created over the property against the statutory charge contained under the KGST Act, 1963 and the KVAT Act, 2003 or any Central enactment". Factual Matrix It is noted that amounts were due from various registered dealers, under the State laws, who had availed loans from various financial institutions. Proceedings were therefore initiated under various enactments such as the KGST Act, 1963, and the KVAT Act, 2003 to recover the amounts due. When steps were initiated to register the documents pertaining to the properties sold by the Banks under the provisions of the SARFAESI Act, 2002, and the RDB Act, 1993, the Registration department objected to the same and issued proceedings stating that since amounts were due to the State Government, as per the provisions of the various statutes, first charge is created over the properties and the documents cannot thus be registered. The banks and the final creditors claimed that they had a right as secured creditors to proceed against the properties in question in terms of the provisions of Section 26E of the SARFAESI Act, 2002 and Section 31B of the RDB Act, 1993, and the statutory charges as per the state acts no longer survive.However, the Revenue and Financial Department of the State also claimed first charge over the properties under the provisions of Section 26B of the KGST Act, 1963 and Section 38 of the KVAT Act, 2003.In light of the rival claims, the Court had to consider the issue as to which authority had the right to proceed against the property, and further, if the Bank had the sold any property, whether the first charge created under the statutes would continue to run with the properties sold.Division Bench RulingThe Division Bench perused Sections 26E, 26B, and 26C of the SARFAESI Act, as well as Section 31B of the RDB Act, and discerned that there were various modalities prescribed for registration of other attachments against the properties mortgaged by the loanees before the financial institutions."However, Section 26E only specifies that the secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority", it noted. It also perused Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002 which had been brought to its notice by the State Government to buttress their argument that the said rules along with Section 26E provided a "clear-cut procedure to enforce the security interest and to remove the...

Sale Of Property Under SARFAESI Will Not Extinguish Prior Existing Charge For Dues Under State Tax Laws : Kerala High Court

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