MVAT Authorities to undertake enforcement action in accordance under the SARFAESI Act
Case Title :- Indian Overseas Bank Versus Deputy Commissioner of State Tax and others
Case No:-WRIT PETITION NO. 11733 OF 2023
Decided on:-March 21,2024
Quorum:-B.P. COLABAWALLA & SOMASEKHAR SUNDARESAN, JJ.
Facts of the case:-
The Petitioner led group of banks provided credit facilities to the Borrower. Occasionally, a number of loan and security agreements were signed by them; A mortgage over land measuring 1035 square meters, together with a factory and other construction on it, located at Plot No. N-3, Additional Ambernath Industrial Area, Anand Nagar, mid c, Village: Jambhivali, Ambernath, District: Thane – 421 506 (“N-3 Property”), and factory land and building measuring 60 square meters at Plot No. A-564, TTC Industrial Area, MIDC, Mahape, Navi Mumbai – 400 710 (“A-564 Property”), together representing the security interest of these secured creditors; Under Section 26-B of the SARFAESI Act, the mortgage over the Secured Assets was recorded with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (hereinafter, “CERSAI”), November 8, 2014. Charge Registration Certificate dated November 3, 2014, filed with the Registrar of Companies, further supports the charge over the Secured Assets.
The Borrower’s account was declared a non-performing asset as of March 31, 2018, due to nonpayment of dues to the consortium; On June 14, 2019, the Petitioner issued a demand notice under Section 13(2) of the SARFAESI Act, claiming a total in debtedness of Rs. 35.31 crores as of May 31, 2019;The Petitioner assumed symbolic ownership of the Secured Assets on September 16, 2019. In the end, the petitioner submitted a request under SARFAESI Act Section 14 before the Thane, the district magistrate, issued an order on June 7, 2022, instructing the Tahsildar to physically seize the Secured Assets. On August 30, 2022, the Petitioner eventually gained physical possession; Since then, seven efforts have been made to sell the Secured Assets through an online auction. On June 19, 2023, the A-564 property was ultimately sold, however the N-3 Property has not; In the meantime, the MVAT Authorities started a vigorous campaign to retrieve alleged tax obligations owed by the Borrower, initially from the borrower and then from the petitioner. The MVAT Authorities claimed that they had a statutory first charge over the secured assets and that any secured creditor’s charge over mortgaged assets would have to give way to this statutory first charge in order to pursue recovery from the petitioner.
Petitioner Contentions:-
The learned counsel for petitioner states that petition challenges attachments of assets made, and consequential actions taken, by Respondent No. 1, Deputy Commissioner Of State Tax, GST Department, Government of Maharashtra and Respondent No. 2, the State Tax Officer, Raigad Division, under the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”). Such attachment and consequential enforcement are directed against immovable property that was mortgaged way back in 2014, by Respondent No.3, Savair Energy Ltd. (“Borrower”) in favour of a Consortium of banks led by the Petitioner, Indian Overseas Bank (“IOB”).For reasons set out in this judgement, we hold that such Enforcement action by Respondent Nos. 1 and 2 (“MVAT Authorities”) is In direct conflict with the explicit provisions of Section 26-E of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) read with Section 37 of the MVAT Act.In a nutshell, Mr. Sidharth Samantray, the learned counsel appearing for the Petitioner would submit that the assertions of the MVAT Authorities are directly contrary to the provisions of Section 26-E Of the SARFAESI Act, which is a non-obstante provision conferring a Superior charge in favour of secured creditors, in priority over claims of The MVAT Authorities.
Respondent Contentions:-
Learned counsel for the respondent Mrs. Vyas, learned counsel appearing on behalf of the MVAT Authorities would submit that the attachments were effected prior to the auction by the Petitioner and therefore, even before the auction was conducted, the Secured Assets stood attached. Mrs. Vyas would submit that the petitioner had been put to notice by the MVAT Authorities that They claimed a first charge over the Secured Assets. Yet, the Petitioner Went ahead with attempts to auction the Secured Assets, on an as-is- Where-is; as-is-what-is; and whatever-there-is basis. The Petitioner’s disclosures about the claims of the MVAT Authorities were not adequate and were inaccurate since the Petitioner had wrongly asserted that dues owed to a bank have priority over dues owed to the MVAT Authorities. She submitted that the attempts by the Petitioner to auction the Secured Assets were also a violation of the letter of prohibition issued on 21st June, 2023. Mrs. Vyas would submit that since the Petitioner has auctioned the A-564 property and has attempted to auction the N-3 Property with full Knowledge of the MVAT Authorities charge and that too on an as-is- Where-is basis, the Petitioner is now duty-bound to deposit the proceeds Of the sale to discharge the amounts claimed by the MVAT Authorities.
The purchaser of the A-564 Property cannot claim to be unaware of the Tax claims. Mrs. Vyas would submit, relying on the decision of a division bench of this Court in the case of Medineutrina Pvt. Ltd. Vs. District Industries Centre & Ors. (“Medineutrina”), which would point to there being a public notice of all statutory charges. According to her, a secured creditor is simply meant to stand first in queue to recover its dues from The sale of a secured asset but the burden of paying the dues owed to the Statutory authorities to discharge the statutory encumbrance would have to be discharged by the secured creditor or the auction purchaser. Mrs.Vyas was granted leave to file written submissions when the Judgment was reserved on 11th January, 2024. The written submissions were received on 2nd February, 2024.
Court Analysis and Judgements:-
The court stated that the impugned attachment orders of the MVAT Authorities Dated 24th February, 2022, 7th April, 2022 (issued to the Borrower) and 31st July, 2023 (issued to the Petitioner) would not confer any priority over the registered security interest enjoyed by the Petitioner-led consortium banks over the secured assets; The Petitioner has the first priority in respect of enforcement against the Secured Assets by reason of Section 26-E and having a prior registration of the security interest with CERSAI. The petitioner is therefore entitled to enforce such security interest enjoying priority over the MVAT Authorities; The Petitioner is entitled to enforce the mortgage over the secured Assets without hindrance and disturbance from the MVAT Authorities, who cannot claim against the Petitioner, except to seek any excess residual amounts from the proceeds of the enforcement of the mortgage over the Secured Assets, after extinguishing the dues owed by the borrower to the mortgagees constituting the Petitioner-led consortium; If the sale of the Secured Assets realizes any amount in excess of the amounts owed by the borrower to the Petitioner-led consortium of banks, the MVAT Authorities may make a claim. For such residual excess amount towards the dues owed by the borrower to the MVAT Authorities.
The demand notice dated 4th August, 2023 asking the Petitioners to pay the tax dues allegedly owed by the borrower is misconceived, unsustainable and without legal basis. Consequently, any mutation entries purporting to mark an Encumbrance in favour of the MVAT Authorities in the land Records shall be invalid. Accordingly, Respondent Nos. 1, 2 and 5 shall cause such entries, if any, to be removed from the land records within a period of two weeks from today; and nothing contained in this judgement is an expression of an opinion on the right of the MVAT authorities to undertake enforcement action in accordance with law against any other assets, properties and persons that are not subject matter of a registered security interest registered in favour of any secured creditor under the SARFAESI Act, and which may therefore be amenable to enforcement for recovery of tax arrears owed by the borrower. It is clarified that the MVAT dues of the borrower cannot be sought to be recovered from any purchaser of the secured assets, who acquire them from the Petitioner-led consortium under the SARFAESI Act
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Judgement Analysis Written by – K.Immey Grace
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