Kerala High Court: Under State Tax Laws, Sale of Property under SARFAESI Act will Not Extinguish prior Existing Charge for Dues

Kerala High Court: Under State Tax Laws, Sale of Property under SARFAESI Act will Not Extinguish prior Existing Charge for Dues

The division bench of Kerala High Court comprising of Chief Justice S. Manikumar and Justice Shaji P. Chaly ruled that the statutory charge under the provisions of Kerala General Sales Tax, Act 1963 (in short KGST Act) and the Kerala Value Added Tax Act, 2003 (in short KVAT Act), (hereinafter collectively referred as State Laws) 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 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short SARFAESI Act) and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (in short RDB Act) read with the Rules to it, till such time the encumbrances are cleared as per the provisions of the said enactments and the rules.

In the present case Tahsildar (RR) & Ors. vs Nizamudeen S & Ors. it was noted that amounts were due from various registered dealers, under the State Laws, who had opted for loans from various financial institutions. Proceedings were initiated 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 opposed 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.

According to the banks and financial creditors they claimed that they had a right against the properties in the capacity of secured creditors 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.

On the other hand, the Revenue and Financial Department of the State also claimed first charge over the properties under Section 26B of the KGST Act and Section 38 of the KVAT Act.

In view of the parallel claims, the High Court had to determine 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.

The bench asserted that as per Sections 26E, 26B, and 26C of the SARFAESI Act, as well as Section 31B of the RDB Act, there were various mechanisms prescribed for registration of other attachments against the properties mortgaged by the loanees before the financial institutions.

The Court stated, "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."

Additionally, it noted that Rule 8 and 9 of the Security Interest (Enforcement) Rules, 2002 (in short Rules 2002) deals with sale of immovable secured assets and had been brought to its notice by the State Government to strengthen their argument that said the rules along with Section 26E provided a "clear-cut procedure to enforce the security interest and to remove the encumbrances in the property."

The High Court ascertained that as per the present law, the State has priority over the property and the charge runs with the property irrespective of the sale conducted by the financial institutions as per the provisions of the SARFAESI Act, 2002 and the RDB Act, 1993. It added that the debts were also to be arranged in priority.

It noted that Section 26E SARFAESI Act made it clear that the provision only creates a 'priority' in favor of the financial institutions with respect to the payment over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or the State Government or local authority.

The Court rejected the averments raised by the banks and financial institutions and held, "it would be more clear from the explanation contained under Section 26E which states that 'for the purpose of the said Section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. The above is a clear indication that it cannot be said that merely because a priority in payment is available to the financial institutions, the statutory charge created under various enactments vanishes."

Accordingly, the High Court allowed the writ appeals.