Indian Overseas Bank vs. The State Of Maharashtra Thr. Gp And Ors

Held

The Court held that the Petitioner-Bank, as a secured creditor, has a prior and first charge over the secured assets. The Court reasoned that Section 26E of the SARFAESI Act explicitly states that secured creditors shall be paid in priority over all other debts and taxes, notwithstanding anything contained in any other law. The Petitioner Bank registered its security interest with CERSAI on November 18, 2014, which predates the attachment order by the State Tax Department on December 11, 2018. The Court relied on the Full Bench judgment in Jalgaon Janta Sahakari Bank Ltd. and a Division Bench judgment in Indian Bank thr. Chief Manager, which established that even if there is an attachment order by State Tax authorities prior to the secured asset's attachment, without further steps like issuing a proclamation of sale, the State Tax Authorities cannot claim priority over a secured creditor whose security interest is registered with CERSAI. The Court directed that the Petitioner is entitled to the Rs. 1,50,00,000/- deposited with the Registrar, Appellate Side, High Court of Bombay, along with accrued interest. The Respondent No. 5 is free to pursue recovery of sales tax dues from Respondent No. 6.

Facts

The Petitioner, Indian Overseas Bank, sanctioned a credit facility of Rs. 42,61,00,000/- to Texplast Industries Limited (Respondent No. 6). To secure this facility, Respondent No. 6 created a mortgage deed on October 2, 2013, over specific properties. The loan account became NPA on March 31, 2014. The Petitioner Bank registered its mortgage charge with CERSAI on November 18, 2014, and took symbolic possession of the secured assets on November 26, 2014, under the SARFAESI Act. The District Magistrate allowed the Petitioner's application for physical possession on September 18, 2015. Meanwhile, on May 22, 2018, the Deputy Commissioner of State Tax (Respondent No. 5) informed the Petitioner about outstanding sales tax dues of Respondent No. 6 and requested the Petitioner to stop auctioning the property. On December 11, 2018, Respondent No. 5 attached the secured assets for sales tax dues amounting to Rs. 1,12,78,272/-. Consequently, the Talathi (Respondent No. 2) recorded mutation entry No. 1087 reflecting this encumbrance. The Petitioner Bank subsequently issued an e-auction notice on April 27, 2022, and Respondent No. 7 became the successful bidder. The present writ petition challenges the mutation entry and seeks a declaration of the Petitioner's prior charge.

Key Issues

1. Whether the Petitioner-Bank, as a secured creditor under the SARFAESI Act, has a prior and first charge over the secured assets, notwithstanding the subsequent attachment order by the State Tax Department for unpaid sales tax dues of Respondent No. 6? Petitioner's Arguments: The Petitioner contended that its security interest was registered with CERSAI on November 18, 2014, prior to the attachment order by the State Tax Department on December 11, 2018. They relied on Section 26E of the SARFAESI Act, which grants priority to secured creditors over all other debts and taxes. They also cited the Full Bench judgment in Jalgaon Janta Sahakari Bank Ltd. and a Division Bench judgment in Indian Bank thr. Chief Manager, asserting that registration of the security interest with CERSAI before any further steps like proclamation of sale by tax authorities establishes their priority. Revenue's Arguments: The Respondent-State argued that the charge of Respondent No. 5 over the secured assets for tax dues was already recorded in the 7/12 extract before the e-auction conducted by the Petitioner on April 27, 2022. They submitted that the Security Interest (Enforcement) Rules, 2002, mandate the Authorized Officer to notify details of encumbrances, implying that the secured creditor and auction purchaser should deposit money to discharge these encumbrances. They also mentioned an amnesty scheme in 2019 and the initiation of CIRP against Respondent No. 6 under IBC 2016, with the Sales Tax Department lodging a claim.