The Kerala High Court expounded that the State has the first charge over the property and that charge runs irrespective of the sale of the property by the financial institution. It was held that the financial institutions do have the right to sell the property as per the law and adjust the amounts due in priority to other debts, but the statutory charge as per the State laws will continue to run.
It was further opined that even if the property is sold by the Banks and payments are adjusted as per the priority, the charge would run with the property until the encumbrances to the first charge are cleared.
Brief Facts:
The writ petitions preferred by the financial institutions under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “SARFAESI”) were allowed and it was held that a secured creditor under Section 26E SARFAESI and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (hereinafter referred to as “RDBA”) holds priority over claims of the Revenue.
It is against the said decision that the present writ appeals have been preferred by the State and its officials.
Brief Background:
Various registered dealers availed loans from financial institutions. To recover the amount, registration of documents related to the properties sold by the Banks under SARFAESI and RDBA had to be done. However, the Registration Department objected on the ground that since a certain amount is due to the State Government, the first charge is created over the properties and hence, documents cannot be registered.
Contentions of the Banks:
The Banks contended that as secured creditors they have the right to proceed against the properties under Section 26E SARFAESI and Section 31B RDBA and that the statutory charges do not survive as per the State Acts. It was argued that the Security Interest (Enforcement) Rules, 2002 are violative of Section 26E SARFAESI.
Contentions of the State:
The State argued that it has the first charge over the properties as per Section 26B of the Kerala General Sales Tax Act, 1963, and Section 38 of the Kerala Value Added Tax Act, 2003. It was contended that the first charge would continue to run with the property even without satisfying the requirements of Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002. It was submitted that the provisions of SARFAESI and RDBA do not create any charge, rather only priority of the debts due is provided for. Further, it was asserted that when a property is being offered for sale by a financial institution, the purchaser is obligated to make due enquiries to discover encumbrances on the said property.
Observations of the Court:
The main issue to be ascertained was who has priority between the financial institutions and the State Government and if any property has been sold by the Bank, whether the first charge created would continue to run.
The Court after analyzing the provisions involved, observed that Section 26E of SARFAESI provides that the secured creditors shall have priority over all other debts, revenues, taxes, cesses, etc. payable to the Central or State Government. The said priority in payment is not in conflict with the first charge created as per the provisions of the State Laws.
The Bench examined several precedents of different High Courts and the Apex Court. It was expounded that the State has the first charge over the property and that charge runs irrespective of the sale of the property by the financial institution. It was held that the financial institutions do have the right to sell the property as per the law and adjust the amounts due in priority to other debts, but the statutory charge as per the State laws will continue to run.
It was further opined that even if the property is sold by the Banks and payments are adjusted as per the priority, the charge would run with the property until the encumbrances to the first charge are cleared.
The High Court considered the parliamentary discussions concerning SARFAESI and RDBA and noted that the said Acts only provide that Banks have to be paid first. It cannot be presumed that the statutory charge created by Central or State enactments are completely negated or vanished. Merely because of the availability of the priority payment provision, the statutory charge cannot be made to be disappeared.
The decision of the Court:
Based on the abovementioned reasons and findings, the Kerala High Court propounded that the mortgage will be termed as subject to a statutory charge in case the said mortgage is created after the amount is due under the provisions of the State enactments. Accordingly, the writ appeals were allowed.
Case Title: The Tahsildar & Ors. V. Nizamudeen.S. & Ors.
Coram: Hon’ble Chief Justice Mr. S. Manikumar, Hon’ble Mr. Justice Shaji P. Chaly
Case No: WA No. 2114 of 2019 & connected cases
Advocates for Appellants: Advs. Shri. K.P. Jayachandran, Shri Mohammed Rafiq, Shri Jaffer Khan Y., Smt. Reshmitha R. Chandran
Advocates for Respondents: Advs. Sri.S. Easwaran, Sri.E.D. George
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