The Gujarat High Court opined that the Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “SARAFESI Act”) is meant for the enforcement of security interests created in favour of the secured creditors. Any other section or rule cannot defeat Section 26 of the SARFAESI Act.
In the present case, Bank became a secured creditor and has a valid first charge over the mortgaged property. Therefore, it would have priority under Section 26E of the SARFAESI Act to recover the dues.
It was propounded that the dues of the bank/financial institution must be paid first before prioritizing the dues payable to the State/Central Government.
Brief Facts:
Respondent No.1 is firm and Respondents No. 2 to 10 are the partners and guarantors. They borrowed money as a loan from the Petitioner which is a bank. From 2015 to 2018. Multiple mortgage deeds were executed between the parties which were registered with the concerned authority.
A major fire broke out in the firm in 2019 and subsequently the firm was declared a Non-Performing Asset (“NPA”). The one-time settlement scheme could not be executed between the parties.
Thereafter, in 2022, a communication was sent by Respondent No.11 (State Tax Authority) to Respondent No. 12 (Revenue Authority) regarding a property that was mortgaged with the Petitioner for recovery of dues under the Gujarat Value Added Tax (VAT).
Respondent No. 12 mutated the entry in the record reflecting dues of the Respondent No.111 and as a result, the property in question was attached.
Therefore, the present petition.
Contentions of the Petitioner:
It was contended that Petitioner is a secured creditor under SARFAESI Act and hence, its dues must be protected first. It was asserted that the entry should be cancelled so that the property stands free from all encumbrances.
Contentions of the Respondents (State Authorities):
It was argued that hue dues were pending under the VAT and further that the rights of the State may be protected while permitting to proceed against the assessee.
Observations of the Court:
The primary issue was whether the dues of the secured financial institution take precedence over state tax dues.
It was noted that the property was mortgaged with the Petitioner and further, the mortgage was registered with the concerned authority. The first charge hence was created by the Petitioner over the property in question. Therefore, the Petitioner became a secured creditor and hence has a right to recover the dues first from the property.
Analyzing judicial precedents, the Court opined that the SARAFESI Act is meant for the enforcement of security interests created in favour of the secured creditors. Any other section or rule cannot defeat Section 26 of the SARFAESI Act.
In the present case, Bank became a secured creditor and has a valid first charge over the mortgaged property. Therefore, it would have priority under Section 26E of the SARFAESI Act to recover the dues.
It was propounded that the dues of the bank/financial institution must be paid first before prioritizing the dues payable to the State/Central Government.
The decision of the Court:
Based on the aforementioned reasons, the High Court partly allowed the petition and directed Respondent to remove the entry and permitted Respondent No. 11 to approach the appropriate forum for its dues.
Case Title: Kotak Mahindra Bank v. M/s Kailash Oil Cake Industries
Coram: Hon’ble Ms. Justice Sonia Gokani. Hon’ble Mr. Justice Sandeep N. Bhatt
Case No: R/Special Civil Application No. 22835 of 2022
Advocate for Petitioner: Adv. Ms. Dharmishta Raval
Advocate for Respondents: Adv. Ms. Pooja Ashar (AGP)
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