Union Bank Of INDIA vs. The State Of Telangana And 5 Others

The brief facts as. narrated in the writ petition arc that 4s respondent i.e., M/s. Jadala Traders, approached the petitioner-

Respondent no.4 defaulted in repayment of the loan amount and therefore, the loan account was classified as Non Performing Asset (NPA) and the petitioner-bank had issued notice dated Ol .O2.2O19 demanding payment of Rs.6,28,28,5.55..58 Ps. as on 01.O2.2019 together with interest with costs and the said notice was served on the respondent and Ot h|r gua ra r )l OrS. l \r\

Respondent no.4 failed to pay the amount demanded within the statutory period and, therefore, petitioner-Bank issued possession notice dated 02.O5.2Oi9, followed by 30 days notice Rule 8(6) 30 days notice dated 13.06.2019 undcr Rule 8(6) of Security Interest (Enforcement) Rules, 2002 (Rutes, 2OO2) by following the procedure contemplated under the Act. Petitioner-Bank also issued e-auction notice dated 07 .1O .2O 19 for sale of the subject properties on 15.11.2019. On 15-11.20i9 e-auction was conducted in respect of properly i.e., House No.2-7-lO4/C in Plot Nos.4 & 5 in Sy.No.72OlA/ I situated at Jammikunta village and mandal, admeasuring 300 square yards and Mrs. Gundla Saroja was declared as successful bidder'

In the meanwhile, respondent no.4 filed W P.No.2496O of 2019 before this Court challenging the said e-auction and obtained interim stay orders restraining the petitioner Bank from confirming the sale in favour of auction purchaser' This Court by order dated 24.11.2021, dismissed the w P'No'24960 of 2Ol9 on merits.

Thereafter, the petitioner-Bank confirmed the sale in favour of auction purchaser and after receiving the entire price, sale certificate dated Ig 'Ol '2022 was issued in lavour of the 3 \

Whcn the pctitioner-Bank came atLachment order dated to know about the 18.03.2019, petitioner_Bank respondent and apprised that immediatt:I1 approached the Srh the attachment ordcr rvould not be applicable to the Bank when the propertv was sold under the Act, 2OO2 by exercising its mortgage rights and requcstcd the 5e respondent to receive and register the sale certificate. However, Sft respondent refused to ente.rain the sa.le certificate. Hence, this Writ petition.

No respondents. iderat creditor over effect over 11

Dur tO. Heard learned cor Bank, sri Rajashekar, ,.'""t' '" V'D}'umani for the petitioner- Tax, rearned counser ," "t"to standrng counsel for commercial rearned Government o,.u "t"u"tnr for respondent no.4 and the der for respondent no.

Cons Now the points for consideration are, (i) Whether the charge created in favour of the the secured interest shall have all other debts rncluding reven ue, Government, etc. ? (ii) Whether the petitioner is entitied to the relief sought in the writ petition for registration of Sale Certificate? overriding rnrtiated measures the action of the rng the course of hearing, leamed counsel for petitioner submitted that attachment order of 3.d respondent wouid not be applicable to the Bank when it under the Act, 2OO2 inciuding sale and respondent no.3 in not registering the sale certificate is in violation of the provisions of Section 26(E) otthe Act, 2OO2 read with Sprion 3t(B) of R / ecovery of Debt and Bankruptcy Act, I I ! :

:.r .r' l-lI,'1..,r tY P No.tn'lii ai 202) 1993 (fbr shorr, Act, 1993). He further submitted that the date of mortgagc oi the petitioner B:rnk relates back to 15.06.2017 and 05.l(J.2O17 ar-rd said mortgage was duly registered rvith the Registrzrr of Assurancc zrs well as the Ccntral Registry under the Act, 2OO2. 13. Thc petrtioner-Bank zrlso filed O.A.No.680 of 2019 before the Debts Rcr:overy Tribunal I at Hyderabad (DRT) against the 4ft respondent for recovery of Rs.6, 14,83,844. 58 ps with future interest. Thc DRT by an order <iated 2.01.2023 allowed the said O.A.. and held tha r pctitioncr bank is entitled to proceed against the pcrson and propertrcs of defendants 2 to 4 and properties ol dclendant no. I Lherein for realization of the debt due. The learned counscl strenuously argued that the action of the 5h respondent in rclusing to register the sale certificate by referring attachment order of 3.,1 respondent, is illegal, arbitrary and u nconstilu lional.

In s,pport of his contention, learned counsel placed reliance on the lollowing decisions: (i) Pridhvi Asset Reconstruction and Securitization Co.Ltd., vs. State ofAndhra Bank and othersr; 2021 (3) ALT 101 \

It is relevant to extract the Section 31B of the Acr, 1993 and Section 26E of the Act, 2OO2: (ii) Section 26tr of Act,2OO2 reads as under: (i) Section 3 18 of the Act, 1993 reads as under: 'S.3 tB. priority to secur anythins contained ,,,", ";': ff:T;: *J".I',JH# the rights of secured creditor payable to them by "ut. or., to realize secured debts due and created, shall have priorit5r ";Tffr":::; ;::il:::tj: other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority., short, Act, J 2ot8 (6) ALD 16 r 2021 (5)ALT 1Ss

Per contra, the learned standing counsel for Commercial Tax, Sri Rajasekhar vehemently argued that the attachment of shall have priority over the charge of further submitted that the attachment the Tax DePartment secured creditors He affected by the Department is prior to effective date of insertron of Section 26E of the AcL, 2OO2 i'e ' 24 07 2O2O and' therefore' attachment of the Tax Department will sustain and shall have priority over the charge of secured creditor' When' this Court reminded him of judgments of State Bank of India v' State of Maharashtra and othersa and also State Bank of India vs' 2020 SgC online Bom 4190

It is appropriate to refer to three judgments relied upon by the counsel for Petitioner'

In Pridhvi Asset Reconstructiol (supra), the Division Bench of Hon'ble High Court of Andhra Pradesh at Amaravati held as under: "1O. A reading of the above provi-sions of law makes it abundantly clear that the said provisions are analog-ous though under two different legislations Section 26E of the Act, ;hich came into force w e.f 24-O|-2O2O begins with 'non obstante'clause and stipulates that after registration of the security interest, the debts due to any secured creditor shalt be paid in priority over all other debts and all revenLtes, taxes, cesses and other rates payable to the Central or State Governments or local authority' Section.3tB of the BankruPtcy Act is also to the same effect. When the language of the provisions of law is very Iucid and clear, no other interpretation is possible'

In the instant case, the 3rd resPondent created mortgage over the subject property by way of a registered s (zoo9) 4 scc 94

In City Union Bank Ltd., (supra), the Division Bench of this Hon'b1e Court held as under:

The preponderance of judicial opinion leads to the irresistible conclusion that the sale of the mortgaged property in favour of the auction purchaser and tnJ slale certiftcate under the SARFAESI Act in such circumstances is free of all encumbrances. The attachments effected subsequent to thc mortgage created rn favour of the bank do not affect thc rights of the secured creditor over the subject property. Such attachments have no impact on the sale conducted under the Act and the same ceases to have any effect or fall to the ground the moment the same is conhrmed in favour of the secured creditor Bank and auction purchaser. Otheruise, those attachments would remain as a permanent taboo prejudiciall_v affecting the marketability and titlc to the property even though the\.

However, the facts of above cases and the facts of present case are slightly different. In thc present case, the attachment of Tax Department ',\,ras in the interregnum period o[ insertion of Section 31-B of RDB Act and Section 26-E of the Act, 2O02, (supra), the Division Bench of this Court held as under:

Regarding the inclusion ot the subject land in the prohibitory List prepared under Section 22-A of the ilegistration Act, 1908 on account ol alleged VAT dues to the 3rd respondent and alleged Income Tax dues to the 4th respondent, it is undisputed that the security interest/charge of thc Bank over the subject property was registered way back on O8 O4.2000 and was reiterated on 2l.Og-2O12 lvhen the 5th respondent was in possession of the property and had crcated such charge for its working caPital Ioan requirements.

Section 26 E of the SARFAEST Act,2OO2 introduced by Act 44 of 2016 w.e.l 24.1.2020 states: "26 E. ftroriry to sccurcd creditors - Notwithstanding an,'thing .o.rtain.a i"'any ottrer law for the tlme beint in force' after the registration ot iecuncv interest, the debts due to.11V sflr!$ criditor shall be pard ln prionty over all o$er debls and-ar iir.nu"., *.", cesses and other rates payablc to the central ;;;;J - S,^t. Govemment or local authority' A*pf.tt.tio". For the purposes of this section' it is hereby clalfred that on or after the commenccment of the Insolvenry ald E-Jrfollp,.y Code ' 2016 (3 I of 20 16)' in cases where insolv€ncy or uurfo"it.i proceed.ints arc PcndrnB in respect of *"11* ?t1i.: of the borrower' Pllonly (o se'urcd (lcditors m paJdnen( ol oeot sn"l b. s.,bj".t to tfte provisions of that Code'" ,6 tft; ii;-;uou. 'p.o"isior' gives prioritv to claims of ;;"r;;;"Ji;..s like the Petition; Bank over the dues o-f the ;;;;J;;- -s;rvice Tax dues/ Income Tax dues and the ;;;-;;;,; clause therein overrides the provision^s-of the i;;;;-i; Act, 1961 and the relansana VAr Act' 2005'

Sccriorr 35 of the SARFAESI Act, 2002 gives olerriding cllect to the sard statute over an] thrng inconslstent therc$,ith in any otht r law. [t statcs: ' Scc.15 l'hc provisions o[ tlrs Act L(, ovemdc olhcr larvs -']he provrs,tons of this Act shall have c[fcc1, nol$.rrhstandurg anvrhng incorlsrstcnt therc\{ith contarnc(l rn .rlry othcr l.r\e for lhc urne bclng Ln force or an\' lnstrument havrng ellecr l)! lirtue ol any such lalv 28. ln our considercd oprnion, after introduction of scction 26-ll of the SARFAEST Act, 2002 \v.c.f. 24.O1.2O2O, once the securit], interest created in favour of the Bank is registered with rhe Central Registry of Securitiz.rtion Asset Reconstructlon and Secunty Interest (CERSAI), the non-obstante clause contained in Section 26'E t/*' Section 35 of the SAITFAESI Act, 2002 \,itl come into play and ovcrride the provrsion such as Scction 26 of the Tclangana VAT Act, 2005 (rvhich give priorih to VAT dues over anJ, other claim) or the order of atLachment dt-09.09.20I6 issued by thc Tax Recoverv Officcr undcr Rule 48 of the ll Schedule to the Income Tax Act, 1961."

It is also relevant to refer to the judgment of Division Bench of Hon'ble High Court of Bombay passed in State Bank of Sales Tax, M.p. Indore and another6; Assistant Commissioner vs. Indian Overseas Bank and othersz; Kalupur Commercial Co-operative Bank Ltd., Vs. State of Gujarats, at paragraph 35 had held as under:

In this view of the matter, though it would not bc nccessary lor us to derrl with the contention of thc respondcnts l.elating to rhc datc of r, (2ot 8) 55 GSTR 2lO (MP) ' AIR 2017 Madras 67 '1 20l9 SCC Online Gujarat 1892

In Kalupur (supra), the Division Bench of Ahmedabad High Court at paras 57 & 5g held as under: '

While it is true that the Bank has taken ovcr the possession o[ the assets of the defaulter uncler-the SARFAESI Act and not under the RDB Act, Section 3lB of the RDB Act, being a substantive provision giving priority to the .secured creriitors,,, thc same rvill be applicable irrespecLive of the procedure through which the recovery is sought to be made. This is particularly bccause Secrion 2(la) ol the RDB Act defines the phrase "secured creditors" to have the same mcaning as assigned to it under the SARFAESI Acr. Morcover, Section 37 of rhe SARFAESI Act clearly provides that the provisions ol the SARFAESI Act shall be in addition to, and not in dcrogation of inter alia the RDB Act. As such, the SARFAESI Act was enacted only lvith the intention of allowmg faster recovery of debts to the secured credits wiLhout interwention of the court. This is apparent from the Statement of Objccts and Rcasons of the SARFAESI Act. Thus, an inte.pretation that, while the secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would .frustrate Lhe object of the SARFAESI Act which is to enable fasL recovery to thc secured creditors.

The insertion of Section 3lE} of the RDB Act will give priority to the secured creditors even ovcr the subsisting charges under other laws on the date o{ the implementaLion o[ the new provision, i.e. 01.09 2016. The Supreme Court, in the case of State of Madhya Pradesh v. State Bank of Indore, (2001) 126 STC t (SC), has held that a provision creating first charge over the property would operate over a1l charges that may t'e in force. The following observations madc in para 5 of the sard judgment are relevant:

In Indian Oversea Bank (supra), Full Bench of Madras l ligh C' ,r r rt held as u ndt r:

Thc sequencc of e.i.ents, facts of the case in State Bank a achmon'. by tax department prior to effective date of section 26E, SARFAtrSI, but after insertion of Section 3Its of RDB Act; .luction of property in the interregnum period. Therefore, in the facts and r:ircumstances of case, we are in respecUul agreement u,ith thc vieu, taken by the Division Bench of High Court of []om bav 2u. Thc borrower/4ff respondent availed credit lacilities from t hc petir ioner-Bank and r)reated charge oyet.the propertr.es vide t.;

It is relevant to nole that the petitioner-Bank had also filed O.A., vide O.A.No.680 of 20i9 before the DRT for recovcry of outstanding amount from the borrower and the same was decreed by the DRT on02.O7.2023. 30. The Division Bench of this Court in State Bank of India vs. Unior of India and others (supra) at paragraph-28 has ( rfter introduction of Section 26-E of the categorically held that z SARFAESI Act, 2OO2 w'ej ' 24'01 2020' once the securiff interest created in favour of the Bank is registered with the Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI)' the non-obstante clause contained in Section 26-E rlw Section 35 of the SARFAESI Act' 2oO2 wili I

Since the petitioner-Bank has followed the procedurc as contemplated under Section 26(E) of the Act, 20o2 and also under Section 31B of the Act, 1993, the auction purchaser is entitled for registration of sale certihcate issued by the security creditor over the subject property. The respondent no'S cannot refuse registration of sale cerliltcate on the ground of attachment by the 3'd respondent since the attachment of 3'd respondent does not affect the rights of the secured creditor over the subject property and therefore' the sale certihcate is deserved to be registered' This point is answered accordingly'

For the aforesaid reasons' the Writ Petition is disposed of with the iollowing directions: (i) The petitioner-Bank shall present the sale certihcate before the sth respondent for registration preferably within a period of four weeks from the date of receipt of copy of this order' (ii) On presentation of sale certiFrcate for registration ' the 5h respondent shall receive and register the : I

Per-rcling miscellaneous applications if anv shall stand closed . P. PADMANABHA REDDY ASSISTANT REGISTRA //' SECTION OFFICE R

One CC to SRI A. RAJASHEKHAR REDDY, S.C. for Commercial Taxes IoPUC]

One CC to Ms. SRTLALITHA, Advocate [OPUC] 9 Two ccs to GP for Stamps and Registration, High court for the state of Telangana at Hyderabad [OUT] '

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