#SARFAESI Archives - Prime Legal

1 Apr

MVAT Authorities to undertake enforcement action in accordance under the SARFAESI Act

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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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29 Mar

Rajasthan High Court: Officers should not interpret section 14 of SARFAESI ACT of 2002 by their own

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Decided on 14-03-2024

Quorum: HON’BLE MR. JUSTICE ANOOP KUMAR DHAND

Facts of the case:-

The petitioner has challenged the decision dated 09.01.2023 issued by the learned District Magistrate of Jaipur, through which the petitioner’s plea was received by filing this writ petition. Section 14 of the SARFAESI Act of 2002, also known as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act has been dismissed. In issuing the contested order dated 09.01.2023 the District Magistrate of Jaipur noted in the contested order that no documentation pertaining to the question of whether or not the agricultural land was mortgaged or the DLC rates of the approved land were submitted had been produced and annexed to the petitioner’s application filed under Section 14 of the SARFAESI Act of 2002.The petitioner was given the opportunity to submit a new application with the necessary supporting documentation even though the application that they had submitted was denied.

Petitioners Contentions:-

Counsel for the petitioner submits that the learned Magistrate has failed to peruse the provisions contained under Section 14 of the SARFAESI Act of 2002. Counsel submits that while deciding the application under Section 14 of the SARFAESI Act of 2002, the Magistrate was supposed to decide the application on its merits not on the technicalities niceties of law. Counsel submits that at the time of deciding the application under Section 14 of the SARFAESI Act of 2002, the Magistrate was required to see whether or not the secure assets falls within its territorial jurisdiction and whether notice under Section 13(2) of The SARFAESI Act of 2002 was furnished or not. Counsel submits that learned District Magistrate was not supposed to act beyond the aforesaid mandate of the SARFAESI Act of 2002. Hence, under these circumstances interference of this court is warranted. In support of his contention, counsel has placed reliance upon the following judgments:-

(I) R.D. Jain and Co. Vs. Capital First Ltd. And Ors. Reported In (2023) 1 SCC 675; and

(II) Additional District Magistrate Vs. SMFG India Credit Company Ltd. And Ors. (Petitions for Special Leave to Appeal C Nos.1081/2024) reported in MANU/SCOR/13095/2024.

Counsel submitted that in view of the submissions made herein above, the impugned order passed by the learned District Magistrate be quashed and set aside.

Court Analysis and Judgement:-

In the considered opinion of this Court, the DM has travelled beyond the scope of Section 14 of the SARFAESI Act of 2002 and thereafter transgressed its jurisdiction by deciding the application filed by the petitioner keeping in view the aforesaid settled proposition of law the order impugned is not sustainable in the eye of law and the same is liable to be quashed and set aside. Accordingly, the order impugned dated 09.01.2023 stands quashed and set aside. The matter is remitted back to the learned District Magistrate, Jaipur to re-register the application filed by the Petitioner under Section 14 of the SARFAESI Act of 2002 on its original number and proceed with the matter strictly in accordance with law. The instant writ petition stands disposed of. Stay application and all application(s) (pending, if any) also stand disposed of. As a word of caution, this Court expects that in future the chief Metropolitan Magistrates/District Magistrates shall follow the orders passed by this court as well as the Apex Court in its letter and spirit and shall not adventure in interpreting the order in their own way registry is directed to send a copy of this order to the Additional Chief Secretary/Principal Secretary, Department of Revenue, Government of Rajasthan, so that the officers may stop interpreting the provisions of Section 14 of the SARFAESI Act of 2002 in their own manner.

Judgement Analysis Written by – K.Immey Grace

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16 Aug

SEBI’s Direction Under Section 11B(1) of the 1992 Act Cannot Prevent Bank From Auctioning Defaulter’s Property In Line With Bank’s Rights Under SARFAESI: Delhi High Court

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Title: ICICI Bank v. Deputy General Manager and Ors.

Decided on: 21st July, 2023

+ W.P.(C) 3796/2022

CORAM: HON’BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV

The Delhi High Court has clarified the scope of SEBI’s powers under Section 11B of the SEBI Act, 1992, stating that SEBI can issue directions to any person or class of persons, including banks, under this section, irrespective of whether they are registered with SEBI under Section 12. However, the court emphasized that SEBI’s powers should be exercised in a manner that does not conflict with or curtail the effect of other laws. The court ruled that SEBI’s direction under Section 11B(1) cannot restrain a bank from auctioning a defaulter’s property according to the bank’s rights under the SARFAESI Act, 2002.

Facts

The case revolved around the petitioner bank and the third and fourth respondents who had borrowed a home loan from the bank and mortgaged a property. The Securities and Exchange Board of India (SEBI) initiated an investigation against a company in which the third and fourth respondents were directors. SEBI ordered that the respondents not dispose of or alienate any assets without prior permission. Meanwhile, the bank noted the respondents’ default in loan repayment, classified their account as a Non-Performing Asset, and issued a demand notice under the SARFAESI Act, 2002. The bank also sought to auction the mortgaged property.

Senior Advocate Sanjiv Sen represented the petitioner, while Senior Advocate Arunabh Choudhury appeared for the respondent.

Analysis

The court analyzed the interplay between SEBI’s powers under the SEBI Act and the rights of banks under the SARFAESI Act. It noted that SEBI’s powers must be exercised carefully to avoid conflicting with other laws. The court pointed out that SEBI’s directions cannot change the material terms of the direction and should not be applicable to those to whom it is not intended.

The court emphasized that the SARFAESI Act prioritizes the debts of secured creditors over other dues. It highlighted the insertion of Section 26E in the SARFAESI Act to protect banks from interference by the state machinery in realizing their dues.

Held

The Delhi High Court held that the SEBI Act’s powers are legitimate and legal as long as they do not breach the mandate of other laws. In this case, the SARFAESI Act’s provisions took precedence over SEBI’s directions. The court concluded that the bank’s actions to realize its secured asset were not connected to the securities market and were governed by the SARFAESI Act. The SEBI Act’s directions were applicable to a broader set of assets and situations.

Thus, the court held that the bank’s rights under the SARFAESI Act should not be curtailed by SEBI’s directions, and the bank could proceed with the auction of the mortgaged property in accordance with the SARFAESI Act.

Written by- Ankit Kaushik

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