Bombay High Court: Lender Bank Registered With CERSAI Takes Precedence Over DCST In SARFAESI Act Enforcement Proceeds

Bombay High Court: Lender Bank Registered With CERSAI Takes Precedence Over DCST In SARFAESI Act Enforcement Proceeds

The Bombay High Court has ruled that a lender bank's registration with the Central Registry of Securitisation and Security Interest of India (CERSAI) takes precedence over the Deputy Commissioner of Sales Tax (GST) (DCST) regarding proceeds of enforcement under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The Bench, Consisting of Justice B.P. Colabawalla and Justice Somasekhar Sundaresan, noted that the Lender Bank obtained the foremost priority in enforcement against the Walkeshwar Flat starting from January 24, 2020, by being the initial registrant with CERSAI, a registration accomplished on January 2, 2020. The bench highlighted that Encore ARC, facilitating the auction on February 28, 2023, assumed priority entitlement from the lender bank through the assignment of loans to the borrowers, inclusive of related security interests, on March 21, 2020.

Mr. Purushottam Prabhakar Chavan, the Petitioner, has contested the enduring attachment imposed by the Sales Tax Authorities on an apartment in Mumbai. This apartment was acquired by Mr. Chavan from an asset reconstruction company as part of enforcement proceedings.

The attachment has been initiated by the state's sales tax authorities, resulting in the Deputy Commissioner of Sales Tax (DCST) being summoned as a respondent, along with Encore ARC. The asset reconstruction company involved is Kallappanna Ichalkaranji Janta Sahakari Bank Ltd. (Lender Bank), which initially provided loans to a group of borrowers. Subsequently, the lender bank assigned the loans and associated security interests to Encore ARC.

The DCST commenced asserting its rights against SMI on October 5, 2015. However, the attachment order issued on that date did not include any restraint on the Walkeshwar Flat. By this time, Mrs. PY Shah had passed away. It wasn't until November 8, 2017, that an attachment order was first applied to the Walkeshwar Flat. Before this, in 2016, several actions under Section 13 of the SARFAESI Act were initiated by the Lender Bank regarding the Walkeshwar Flat, including attachment before judgment in arbitration proceedings. Physical possession of the Walkeshwar Flat was also taken on January 5, 2017.

The raised issue revolves around whether the petitioner, who purchased the Walkeshwar Flat through auction under the SARFAESI Act, holds a valid claim to free and marketable title to the property. Both the Lender Bank and the DCST contended that the Walkeshwar Flat is specifically under their first priority.

Section 37 of the MVAT Act, when examined independently, indicates the approach towards its reconciliation and harmonious interpretation with Section 26-E of the SARFAESI Act. While Section 37(1) of the MVAT Act takes precedence over any contractual provision establishing a charge, it remains subordinate to any provision within a Central Act that grants priority to another entity. The Bench, as evidenced in the Jalgaon Janta case, has determined that the primary charge outlined in Section 37(1) of the MVAT Act would defer to the priority specified in Section 26-E of the SARFAESI Act. Notably, the SARFAESI Act, being a Central Act, grants first priority to secured creditors, contingent upon the registration of security interest with CERSAI.

The court observed that attachment orders issued before January 24, 2020, do not aid in granting priority to the DCST concerning claims over the Walkeshwar Flat. Since the DCST has not registered with CERSAI and no sale proclamation has been issued, the lender's priority entitlement remains intact. Consequently, the entitlement was passed on to Encore ARC. As a result of this priority, the petitioner holds a free and marketable title, unencumbered by the claims asserted by the DCST.

The court ruled that any attachment sought in connection with value-added tax and central sales tax dues owed by SMI, particularly concerning the Walkeshwar Flat, is nullified and revoked. Consequently, the petitioner is entitled to have the Walkeshwar flat registered in their name, and the DCST cannot raise any objections to such registration.

"The DCST is entitled to any remaining proceeds resulting from the sale of the Walkeshwar Flat, subsequent to settling the dues owed to Encore ARC, up to the extent of Bharat's share of entitlement to Mrs. PY Shah's estate. To facilitate this, Encore ARC is instructed to furnish the DCST with a statement of accounts detailing the borrowers' outstanding dues to Encore ARC and the allocation of sale proceeds by Encore ARC following the auction of the secured assets," the Court observed.