Companies Act Case Law Central Bank of India Vs State of Kerala

Companies Act Case Law Central Bank of India Vs State of Kerala

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.95 OF 2005
Central Bank of India … Appellant

Versus

State of Kerala and others … Respondents

WITH

C.A. No.2811 of 2006, C.A. No.3549 of 2006, C.A. No.3973 of 2006, C.A. No.4174 of
2006, C.A. No.4909 of 2006, C.A. No.1288/2007 and C.A. No.1318_of 2009 [arising
out of S.L.P.(C ) No. 24767 of 2005]

 

JUDGMENT
G.S. Singhvi, J.

 

1. Leave granted in S.L.P. (C) No.24767 of 2005.

 

2. Whether Section 38C of the Bombay Sales Tax Act, 1959 [for short “the

Bombay Act”] and Section 26B of the Kerala General Sales Tax Act, 1963 [for short

“the Kerala Act”] and similar provision contained in other State legislations by which

first charge has been created on the property of the dealer or such other person, who

is liable to pay sales tax etc., are inconsistent with the provisions contained in the

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short `the

DRT Act’) for recovery of `debt’ and the Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002 (for short `the

Securitisation Act’) for enforcement of `security interest’ and whether by virtue of

non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the

Securitisation Act, two Central legislations will have primacy over State legislations
are the questions which arise for determination in these appeals.

 

3. For the sake of convenience, we have taken notice of the facts of Civil

Appeal Nos.95/2005 and 2811/2006 and the reasons contained in the orders passed by

Kerala and Bombay High Courts, which are under challenge in these appeals.
4. C.A. No.95/2005 – Central Bank of India vs. State of Kerala & others –

Central Bank of India, which is a nationalized bank, gave cash/ credit facility to the

tune of Rs.12 lakhs to Kerala Refineries (P) Ltd. The borrower executed mortgage of

movable and immovable properties for securing repayment. As the borrower failed

to repay the dues, the bank filed civil suit bearing O.S. No.234/1996 in the Court of

Sub-Judge at Mavelikara. Later on the suit was transferred to Ernakulam Bench of

the Debts Recovery Tribunal (hereinafter referred to as “the Tribunal”). By an

order dated 1.12.2000, the Tribunal decreed the suit for an amount of Rs.55 lakhs

with future interest. As a sequel to this, Recovery Certificate dated 1.11.2001 was

issued in favour of the bank and the Recovery Officer issued notice for sale of the

movable and immovable properties of the borrower. At that stage, Tehsildar,

Mavelikara issued notice dated 26.11.2001 to the borrower for recovery of

Rs.40,38,481/- as arrears of sales tax stating therein that its moveable and immovable

properties had been attached on 2.2.2000 and 4.9.2000 and that steps are being taken

to sell the attached property by public auction. The Tehsildar claimed that by virtue

of Section 26B of the Kerala Act, as amended by Act No.23/1999, the State

Government has got first charge over the attached properties. The bank challenged

the notice of the Tehsildar by filing a petition under Article 226 of the Constitution of

India, which was registered as O.P. No.7835/2002(G). The bank relied on the

decisions of this Court in A.P. State Financial Corporation v. Official Liquidator

[(2000) 7 SCC 291] and Allahabad Bank v. Canara Bank and another [(2000) 4 SCC

406], and pleaded that being a Central legislation, the DRT Act would prevail over
the Kerala Act by which first charge was created in favour of the State. The learned

Single Judge of the Kerala High Court negatived the bank’s challenge by observing

that proceedings under the Kerala Act had been initiated before the issue of

certificate by the Tribunal and that even if the Tribunal has got exclusive jurisdiction

to recover the amount due to the bank, the Tehsildar was not obliged to approach it

for recovery of the State dues. The learned Single Judge referred to Section 46 of the

Kerala Revenue Recovery Act, 1968, which provides that within 14 days from the

date of attachment of any immovable property any person other than the defaulter

can lodge objection to the attachment of the whole or any portion of such property on

the ground that such property was not liable for the arrears of public revenue, and

held that as the bank had claimed first charge or prior charge over the attached

property, it can file appropriate objections under Section 46 of the Kerala Revenue

Recovery Act, 1968 and make a prayer that public revenue can be recovered after

paying its dues. The learned Single Judge further observed that in terms of Section

47 of the Kerala Revenue Recovery Act, 1968 the petitioner can obtain release of the

attached property by paying arrears of the public revenue. The appeal preferred

against the order of the learned Single Judge was dismissed by the Division Bench

which held that the bank can avail remedy by filing objections under Sections 46 to

48 of the Kerala Revenue Recovery Act, 1968.
5. C.A. No.2811/2006 – The Thane Janata Sahakari Bank Ltd. vs. The

Commissioner of Sales Tax & others – Appellant – Thane Janata Sahakari Bank Ltd.,

which is a scheduled cooperative society incorporated under the Maharashtra

Cooperative Society Act, 1960 granted credit facilities to M/s. Charishma Cosmetics

Pvt. Ltd. Co. (for short `the Company’). As on 30.6.2004, the company had availed

credit facility to the tune of Rs.2,32,00,000/- by creating equitable mortgage of its

factory, land and building in favour of the bank. Due to the company’s failure to

repay the amount, its account was classified as non-performing asset and the bank
initiated proceedings under the Securitisation Act by issuing notice under Section 13

(2). The possession of movable and immovable properties of the company is said to

have been taken by the bank on 15.2.2005 and the same were sold for a sum of

Rs.66,31,001/-. On 11.7.2005, Assistant Commissioner of Sales Tax informed the bank

that sales tax dues amounting to Rs.3,62,82,768/- constitute first charge against the

company and, therefore, it could not have taken possession of the mortgaged assets

and sold the same. After some correspondence, the Assistant Commissioner issued

notice dated 16.8.2005 to the bank to show cause as to why action may not be taken

against it under Section 39 of the Bombay Sales Tax Act, 1959 (for short “the

Bombay Act”) for recovery of Rs.49,68,614/- in addition to the auction proceeds. The

bank unsuccessfully contested the notice and then filed writ petition for quashing the

same. It was urged on behalf of the bank that in view of the conflict between Section

38C of the Bombay Act and Section 35 of the Securitisation Act, the latter being a

Central legislation, the first charge created by the State Act cannot have priority over

debts of the bank because while enacting the Securitisation Act the Parliament will be

deemed to be aware of the provisions of the State legislation. It was also contended

that under Section 169 of Maharashtra Land Revenue Code, 1966, the State

Government can claim priority over unsecured dues, but being secured creditor, the

bank has first and exclusive charge over the properties of the company and has

priority over the sales tax dues of the State. The Division Bench of the High Court

analysed the provisions of the Securitisation Act, the State Act and observed:-

“……… if any Central Act provides for first charge, the charge
created under Section 38C of Bombay Sales Tax Act is
overridden. Conversely, if the Central Act does not provide for
first charge in respect of the liability under the said Act, the first
charge created under Section 38C of Bombay Sales Tax Act shall
hold the field.”
The Division Bench then noted that Section 13 of the Securitisation Act does not

create first charge in favour of the banks; that it merely provides the machinery for
realization by a secured creditor of the security interest without intervention of the

Court or Tribunal; that it overrides the provisions contained in Sections 69 or 69A of

the Transfer of Property Act which empower the mortgagee to sell or concur in

selling the mortgaged property or any part thereof in default of payment of the

mortgage money without intervention of the Court in the circumstances referred to in

Section 69 and for payment of Court Receiver as provided in Section 69A and held:

“The Bombay Sales Tax Act and the Securitisation Act have been
enacted by the competent legislatures for different purposes and
operate in different fields. The Bombay Sales Tax Act is enacted
by the State Legislature under Entry 54 of List II in the Seventh
Schedule for levy of tax on the sale or purchase of certain goods in
the State of Bombay (now State of Maharashtra). On the other
hand, the Securitisation Act has been enacted by the Parliament
under Entry 54 of List I for regulating the Securitisation and
reconstruction of financial assets and for enforcement of security
interest. There is neither any conflict in these two Acts nor
Section 38 C of the Bombay Sales Tax Act can be said to be
inconsistent with Section 35 of the Securitisation Act. The area of
operation is entirely different and there is no overlapping
anywhere.

Section 35 of the Securitisation Act may have had some bearing, if
there was some provision in the Securitisation Act for first charge
in favour of the banks and financial institutions. But neither
Section 13 nor any other provision under the Securitisation Act
makes a provision for first charge.

There being no provision in the Securitisation Act providing for
first charge in favour of the banks section 35 of the Securitisation
Act cannot be held to override section 38C of the Bombay Sales
Tax Act, 1959 that specifically provides that the liability under the
said Act shall be the first charge. The overriding provision
contained in Section 38C is only subject to the provision of the
first charge in the Central Act holding the field. The case of the
Bank is not covered by the expression, “subject to any provision
regarding first charge in any Central Act for the time being in
force” and that being the position, Section 38C is not overridden
by section 35 of the Securitisation Act.”

 

6. S/Shri Shekhar Naphde, Dushyant Dave, Bishwajeet Bhattacharya, T.L.V.

Iyer and Ms. Indu Malhotra, learned senior counsel appearing for the appellants

argued that as the DRT Act and Securitisation Act have been enacted by the

Parliament under Article 246(1) read with Entry 45 in List I in the Seventh Schedule
of the Constitution for speedy recovery of debts due to banks or financial institutions

or for enforcement of security interest by the secured creditors and overriding effect

has been given to these legislations vis-a-vis other laws, the provisions contained

therein will have primacy over State legislations which have been enacted under

Article 246(2) read with Entry 54 in List II in the Seventh Schedule and under which

first charge has been created in favour of the State in respect of the dues of sales tax

etc. Shri Dushyant Dave relied upon the judgments in State of West Bengal v.

Kesoram Industries Ltd. and others [(2004) 10 SCC 201] and Govt. of A.P. and anr.

v. J.B. Educational Society and anr. [(2005) 3 SCC 212], and argued that even

though the Central and State legislations have not been enacted with reference to a

particular entry in List III in the Seventh Schedule, Article 254 will get attracted, and

the Kerala and Bombay High Courts committed an error by refusing to accept the

submission that banks, financial institutions and secured creditors have priority in

the matter of recovery of debts or enforcement of security interest vis-`-vis the State’s

right to recover the dues of sales tax etc. Shri Bishwajeet Bhattacharya submitted

that in view of Article 254(1) of the Constitution, provisions contained in State laws

which are repugnant to or inconsistent with Central legislations, are liable to be

ignored. All the learned counsel laid considerable emphasis on the non obstante

clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation

Act, and argued that even though the language of Section 38C of the Bombay Act and

Section 26B of the Kerala Act suggests that State legislations have been given

overriding effect vis a vis other laws, the courts are duty bound to give full effect to

the primacy of Central legislations over State legislations. Shri Shekhar Naphde and

other learned counsel heavily relied on Section 13(1), (7) and (9) of the Securitisation

Act and argued that when Parliament has designedly given priority to the right of

banks etc. to recover their dues or enforce security interest, first charge created

under the State legislation must be treated sub-servient to such right. Learned senior
counsel made a pointed reference to the provisos incorporated in Section 13(9) for

giving priority to the dues of the workers of the company in liquidation and argued

that in the absence of similar provision in relation to sales tax dues etc. payable to the

State, priority given to the dues of banks etc. cannot be diluted or stultified by giving

over stretched interpretation to the provisions contained in the State legislations

relating to first charge.

 

7. Shri Rakesh Dwivedi and Shri S.K. Dholakia, learned senior counsel

appearing for the States of Kerala and Maharashtra respectively argued that even

though the DRT Act and Securitisation Act contain non obstante clauses suggesting

that the provisions contained therein would prevail over other laws, the same must be

interpreted keeping in view the legislative policy underlying those enactments and if

they are so interpreted, Section 38C of the Bombay Act and Section 26B of the Kerala

Act and similar provisions contained in other State legislations by which first charge

has been created on the property of the dealer or any other person liable to pay sales

tax etc. cannot be treated inconsistent with Central legislations. Shri Dwivedi

submitted that the DRT Act and Securitisation Act have been enacted to speed up the

recovery of the dues of banks, financial institutions and secured creditors but there is

no provision in the two enactments by which first charge has been created in favour

of banks, etc. and, therefore, the provisions contained in State legislations creating

first charge in respect of the dues of sales tax etc. cannot be treated as inconsistent

with Central legislations. Shri Dwivedi further submitted that levy and collection of

tax etc. is sovereign function as well as necessity of the State and as such the State has

exclusive plenary power to legislate on that subject and in the absence of any

provision in the DRT Act or Securitisation Act creating first charge in favour of the

banks etc., in lieu of their dues, these legislations cannot be given overriding effect

qua the provisions contained in the State legislations and right of the State to recover
the dues of sales tax etc. cannot be frustrated merely because a bank or financial

institution or secured creditor has initiated action for recovery of debt etc. by filing

application under Section 19 of the DRT Act or by resorting to the procedure

contained in Section 13 of the Securitisation Act. In support of this argument,

learned senior counsel invoked the doctrine of sub silentio.

 

8. We have considered the respective arguments/submissions. Article 245 of

the Constitution is the source of legislative power of Parliament and State

legislatures. It provides that subject to the provisions of the Constitution, Parliament

may make laws for the whole or any part of the territory of India, and the legislature

of a State may make laws for the whole or any part of the State. The legislative field

of the Parliament and State legislatures has been specified in Article 246. In terms of

Clause (1) of Article 246, Parliament has exclusive power to make laws with respect

to any of the matters enumerated in List I in the Seventh Schedule. Under Clause (2)

the Parliament and subject to Clause (1), the legislature of any State also have power

to make laws with respect to any of the matters enumerated in List III in the Seventh

Schedule. Subject to Clauses (1) and (2), the legislature of State has exclusive power

to make laws for such State or any part thereof with respect to any of the matters

enumerated in List II in the Seventh Schedule. It is thus evident that Parliament has

exclusive power to legislate with respect to any of the matters enumerated in List I

and State legislatures enjoys similar power with respect to any of the matters

enumerated in List II. The combined effect of the different clauses of Article 246 is

that in respect of any matter falling within List I, Parliament has exclusive power of

legislation, whereas the State legislature has exclusive power to make laws for such

State or any part thereof with respect to any of the matters enumerated in List II in

the Seventh Schedule and with respect to the matters enumerated in List III, both the

Parliament and State legislature have power to make laws. Article 254 which
contains mechanism for resolution of conflict between Central and State legislations

enacted with respect to any matter enumerated in List III of the Seventh Schedule

reads as under:

“254. Inconsistency between laws made by Parliament and laws
made by the Legislatures of States.– (1) If any provision of a law
made by the Legislature of a State is repugnant to any provision
of a law made by Parliament which Parliament is competent to
enact, or to any provision of an existing law with respect to one of
the matters enumerated in the Concurrent List, then, subject to
the provisions of clause (2), the law made by Parliament, whether
passed before or after the law made by the Legislature of such
State, or, as the case may be, the existing law, shall prevail and the
law made by the Legislature of the State shall, to the extent of the
repugnancy, be void.
(2) Where a law made by the Legislature of a State with respect to
one of the matters enumerated in the Concurrent List contains
any provision repugnant to the provisions of an earlier law made
by Parliament or an existing law with respect to that matter, then,
the law so made by the Legislature of such State shall, if it has
been reserved for the consideration of the President and has
received his assent, prevail in that State:
Provided that nothing in this clause shall prevent Parliament
from enacting at any time any law with respect to the same matter
including a law adding to, amending, varying or repealing the law
so made by the Legislature of the State.”
9. Article 254 was interpreted by the Constitution Bench in Zaverbhai

Amaidas v. State of Bombay [(1955) SCR 799] in the context of challenge to Bombay

Act No. 36/1947 on the ground that the same is repugnant to Section 7(1) of the

Essential Supplies (Temporary Powers) Act, 1946. The Constitution Bench referred

to the judgment in The Attorney General of Ontario v. The Attorney General for the

Dominion [1896 A.C. 348] and held “now by the proviso to Article 254(2) the

Constitution has enlarged the powers of Parliament, and under that proviso,

Parliament can do what the Central legislature could not under Section 107(2) of the

Government of India Act and enact a law adding to, amending, varying, repealing a

law of the State, when it relates to a matter mentioned in the Concurrent List. The

proposition then is that under the Constitution Parliament can, acting under the
proviso to Article 254(2), repeal a State law. But when it does not expressly do so,

even then the State law will be void under that provision if it conflicts with a later

“law” with respect to the same matter”, that may be enacted by Parliament. In A.S.

Krishna v. State of Madras [(1957) SCR 399] the Constitution Bench considered

challenge to validity of Madras Prohibition Act, 1937 on the ground that the same is

repugnant to the Indian Evidence Act, 1872 and the Code of Criminal Procedure,

1898 which were enacted by the Parliament. The Constitution Bench repelled the

challenge and held:

“The position, then, might thus be summed up: When a law is
impugned on the ground that it is ultra vires the powers of the
legislature which enacted it, what has to be ascertained is the true
character of the legislation. To do that, one must have regard to
the enactment as a whole, to its objects and to the scope and effect
of its provisions. If on such examination it is found that the
legislation is in substance one on a matter assigned to the
legislature, then it must be held to be valid in its entirety, even
though it might incidentally trench on matters which are beyond
its competence. It would be quite an erroneous approach to the
question to view such a statute not as an organic whole, but as a
mere collection of sections, then disintegrate it into parts, examine
under what heads of legislation those parts would severally fall,
and by that process determine what portions thereof are intra
vires, and what are not. Now, the Madras Prohibition Act is, as
already stated, both in form and in substance, a law relating to
intoxicating liquors. The presumptions in Section 4(2) are not
presumptions which are to be raised in the trial of all criminal
cases, as are those enacted in the Evidence Act. They are to be
raised only in the trial of offences under Section 4(1) of the Act.
They are therefore purely ancillary to the exercise of the
legislative power in respect of Entry 31 in List II. So also, the
provisions relating to search, seizure and arrest in Sections 28 to
32 are only with reference to offences committed or suspected to
have been committed under the Act. They have no operation
generally or to offences which fall outside the Act. Neither the
presumptions in Section 4(2) nor the provisions contained in
Sections 28 to 32 have any operation apart from offences created
by the Act, and must, in our opinion, be held to be wholly
ancillary to the legislation under Entry 31 in List II. The Madras
Prohibition Act is thus in its entirety a law within the exclusive
competence of the Provincial Legislature, and the question of
repugnancy under Section 107(1) does not arise.”
10. In M/s. Hoechst Pharmaceuticals Ltd. and others v. State of Bihar and
others [(1983) 4 SCC 45], this Court considered the question whether there is any

conflict between Drugs (Price Control) Order, 1979 made under Section 3 of the

Essential Commodities Act, 1955 which is a Central legislation and Section 5(3) of the

Bihar Finance Act, 1981 by which surcharge was levied on certain dealers engaged in

selling drugs. While negating challenge to the State legislation, a three-Judge Bench

laid down the following principles:

(1) The various entries in the three lists are not “powers”
of legislation but “fields” of legislation. The Constitution effects a
complete separation of the taxing power of the Union and of the
States under Article 246. There is no overlapping anywhere in the
taxing power and the Constitution gives independent sources of
taxation to the Union and the States.
(2) In spite of the fields of legislation having been
demarcated, the question of repugnancy between law made by
Parliament and a law made by the State Legislature may arise
only in cases when both the legislations occupy the same field with
respect to one of the matters enumerated in the Concurrent List
and a direct conflict is seen. If there is a repugnancy due to
overlapping found between List II on the one hand and List I and
List III on the other, the State law will be ultra vires and shall
have to give way to the Union law.
(3) Taxation is considered to be a distinct matter for purposes of
legislative competence. There is a distinction made between
general subjects of legislation and taxation. The general subjects
of legislation are dealt with in one group of entries and power of
taxation in a separate group. The power to tax cannot be
deduced from a general legislative entry as an ancillary power.
(4) The entries in the lists being merely topics or fields of
legislation, they must receive a liberal construction inspired by a
broad and generous spirit and not in a narrow pedantic sense. The
words and expressions employed in drafting the entries must be
given the widest-possible interpretation. This is because, to quote
V. Ramaswami, J., the allocation of the subjects to the lists is not
by way of scientific or logical definition but by way of a mere
simplex numeration of broad categories. A power to legislate as to
the principal matter specifically mentioned in the entry shall also
include within its expanse the legislations touching incidental and
ancillary matters.
(5) Where the legislative competence of the legislature of any State
is questioned on the ground that it encroaches upon the legislative
competence of Parliament to enact a law, the question one has to
ask is whether the legislation relates to any of the entries in List I
or III. If it does, no further question need be asked and
Parliament’s legislative competence must be upheld. Where there
are three lists containing a large number of entries, there is bound
to be some overlapping among them. In such a situation the
doctrine of pith and substance has to be applied to determine as to
which entry does a given piece of legislation relate. Once it is so
determined, any incidental trenching on the field reserved to the
other legislature is of no consequence. The court has to look at the
substance of the matter. The doctrine of pith and substance is
sometimes expressed in terms of ascertaining the true character of
legislation. The name given by the legislature to the legislation is
immaterial. Regard must be had to the enactment as a whole, to its
main objects and to the scope and effect of its provisions.
Incidental and superficial encroachments are to be disregarded.
(6) The doctrine of occupied field applies only when there is a
clash between the Union and the State Lists within an area
common to both. There the doctrine of pith and substance is to be
applied and if the impugned legislation substantially falls within
the power expressly conferred upon the legislature which enacted
it, an incidental encroaching in the field assigned to another
legislature is to be ignored. While reading the three lists, List I has
priority over Lists III and II and List III has priority over List II.
However, still, the predominance of the Union List would not
prevent the State Legislature from dealing with any matter within
List II though it may incidentally affect any item in List I.

[Emphasis supplied]
11. The three-Judge Bench also dealt with the scope of Article 254 and held:

“Article 254 of the Constitution makes provision first, as to what
would happen in the case of conflict between a Central and State
law with regard to the subjects enumerated in the Concurrent
List, and secondly, for resolving such conflict. Article 254(1)
enunciates the normal rule that in the event of a conflict between a
Union and a State law in the concurrent field, the former prevails
over the latter. Clause (1) lays down that if a State law relating to
a concurrent subject is `repugnant’ to a Union law relating to that
subject, then, whether the Union law is prior or later in time, the
Union law will prevail and the State law shall, to the extent of
such repugnancy, be void. To the general rule laid down in clause
(1), clause (2) engrafts an exception viz. that if the President
assents to a State law which has been reserved for his
consideration, it will prevail notwithstanding its repugnancy to an
earlier law of the Union, both laws dealing with a concurrent
subject. In such a case, the Central Act, will give way to the State
Act only to the extent of inconsistency between the two, and no
more. In short, the result of obtaining the assent of the President
to a State Act which is inconsistent with a previous Union law
relating to a concurrent subject would be that the State Act will
prevail in that State and override the provisions of the Central
Act in their applicability to that State only. The predominance of
the State law may however be taken away if Parliament legislates
under the proviso to clause (2). The proviso to Article 254(2)
empowers the Union Parliament to repeal or amend a repugnant
State law, either directly, or by itself enacting a law repugnant to
the State law with respect to the `same matter’. Even though the
subsequent law made by Parliament does not expressly repeal a
State law, even then, the State law will become void as soon as the
subsequent law of Parliament creating repugnancy is made. A
State law would be repugnant to the Union law when there is
direct conflict between the two laws. Such repugnancy may also
arise where both laws operate in the same field and the two
cannot possibly stand together.”

 

12. In State of West Bengal v. Kesoram Industries Ltd. (supra), the majority

of the Constitution Bench recognized the possibility of overlapping of legislations

enacted under different entries in Lists I and II in the Seventh Schedule and

observed:

“While reading the three lists, List I has priority over Lists III and
II and List III has priority over List II. However, still, the
predominance of the Union List would not prevent the State
Legislature from dealing with any matter within List II though it
may incidentally affect any item in List I.
In spite of the fields of legislation having been demarcated, the
question of repugnancy between law made by Parliament and a
law made by the State Legislature may arise only in cases when
both the legislations occupy the same field with respect to one of
the matters enumerated in List III and a direct conflict is seen. If
there is a repugnancy due to overlapping found between List II on
the one hand and List I and List III on the other, the State law will
be ultra vires and shall have to give way to the Union law.

…. If there is conflict, the correct approach is to find an answer to
three questions step by step as under:

One–Is it still possible to effect reconciliation between two entries
so as to avoid conflict and overlapping?

Two–In which entry the impugned legislation falls, by finding
out the pith and substance of the legislation. In this regard the
court has to look at the substance of the matter. The doctrine of
pith and substance is sometimes expressed in terms of ascertaining
the true character of legislation. The name given by the
legislature to the legislation is immaterial. Regard must be had to
the enactment as a whole, to its main objects and to the scope and
effect of its provisions. Incidental and superficial encroachments
are to be disregarded. Interpretation is the exclusive privilege of
the Constitutional Courts and the court embarking upon the task
of interpretation would place such meaning on the words as would
effectuate the purpose of legislation avoiding absurdity,
unreasonableness, incongruity and conflict. As is with the words
used so is with the language employed in drafting a piece of
legislation. That interpretation would be preferred which would
avoid conflict between two fields of legislation and would rather
import homogeneity. It follows as a corollary of the abovesaid
statement that while interpreting tax laws the courts would be
guided by the gist of the legislation instead of by the apparent
meaning of the words used and the language employed. The
courts shall have regard to the object and the scheme of the tax
law under consideration and the purpose for which the cess is
levied, collected and intended to be used. The courts shall make
endeavour to search where the impact of the cess falls. The
subject-matter of levy is not to be confused with the method and
manner of assessment or realization.
and
Three – Having determined the field of legislation where in the
impugned legislation falls by applying the doctrine of pith and
substance, can an incidental trenching upon another field of
legislation be ignored? Once it is so determined if the impugned
legislation substantially falls within the power expressly conferred
upon the legislature which enacted it, an incidental encroaching
in/trenching on the field assigned to another legislature is to be
ignored.”

 

13. In Govt. of A.P. and anr. v. J.B. Educational Society and anr. (supra), the

Court was called upon to decide whether there was any conflict between the

provisions of All India Council for Technical Education Act, 1987 and the A.P.

Education Act, 1982 and whether the State legislation was liable to be declared void

and inoperative on the ground that the State legislature was not competent to enact

law in the field occupied by the Central legislation. A two-Judge Bench analysed the

provisions of the two enactments and held:

“Parliament has exclusive power to legislate with respect to any of
the matters enumerated in List I, notwithstanding anything
contained in clauses (2) and (3) of Article 246. The non obstante
clause under Article 246(1) indicates the predominance or
supremacy of the law made by the Union Legislature in the event
of an overlap of the law made by Parliament with respect to a
matter enumerated in List I and a law made by the State
Legislature with respect to a matter enumerated in List II of the
Seventh Schedule.

……………………….

With respect to matters enumerated in List III (Concurrent List),
both Parliament and the State Legislature have equal competence
to legislate. Here again, the courts are charged with the duty of
interpreting the enactments of Parliament and the State
Legislature in such manner as to avoid a conflict. If the conflict
becomes unavoidable, then Article 245 indicates the manner of
resolution of such a conflict.
Thus, the question of repugnancy between the parliamentary
legislation and the State legislation can arise in two ways. First,
where the legislations, though enacted with respect to matters in
their allotted sphere, overlap and conflict. Second, where the two
legislations are with respect to matters in the Concurrent List and
there is a conflict. In both the situations, parliamentary legislation
will predominate, in the first, by virtue of the non obstante clause
in Article 246(1), in the second, by reason of Article 254(1). Clause
(2) of Article 254 deals with a situation where the State legislation
having been reserved and having obtained President’s assent,
prevails in that State; this again is subject to the proviso that
Parliament can again bring a legislation to override even such
State legislation.”
14. The ratio of the above noted judgments is that Article 254 gets attracted

only when both Central and State legislations have been enacted on any of the

matters enumerated in List III in Seventh Schedule and there is conflict between two

legislations. Though in State of West Bengal v. Kesoram Industries Ltd. (supra)

some observations appear to have been made suggesting that Article 254 gets

attracted even though legislations may have been enacted in different entries in Lists

I and II, but the same have to be read in consonance with the plain language of the

said Article and other judgments including the three-Judge Bench judgment in M/s.

Hoechst Pharmaceuticals Ltd. and others v. State of Bihar and others (supra), which

has been expressly approved by the Constitution Bench.

 

15. Undisputedly, the DRT Act and Securitisation Act have been enacted by
Parliament under Entry 45 in List I in the Seventh Schedule whereas Bombay and

Kerala Acts have been enacted by the concerned State legislatures under Entry 54 in

List II in the Seventh Schedule. To put it differently, two sets of legislations have

been enacted with reference to entries in different lists in the Seventh Schedule.

Therefore, Article 254 cannot be invoked per se for striking down State legislations

on the ground that the same are in conflict with the Central legislations. That apart,

as will be seen hereafter, there is no ostensible overlapping between two sets of

legislations. Therefore, even if the observations contained in Kesoram Industries’

case (supra) are treated as law declared under Article 141 of the Constitution, the

State legislations cannot be struck down on the ground that the same are in conflict

with Central legislations.

 

16. Before proceeding further we may notice the background in which the

DRT and Securitisation Acts were enacted, and schemes of the two legislations. After

independence, the Government of India decided to give impetus to the industrial

development of the country. Central and State Governments encouraged banks and

other financial institutions to liberalize the grant of loans and other credit facilities to

the industrial entrepreneurs. With the nationalization of banks, this policy got a

boost and the country witnessed rapid industrialization. The issue of

repayment/recovery of loans etc. given by banks and financial institutions did not

pose any serious problem in first three decades. However, with the passage of time,

the human greed took over the righteousness and those who were granted loans

and/or other financial facilities did not bother to repay. Not only this, the efforts

made by banks and financial institutions for recovery of their dues were stultified by

the defaulting borrowers who indulged in unwarranted and protracted litigation in

civil courts. The slow and tardy progress of cases instituted in civil courts resulted in

blocking of several thousand crores of public money, which was considered critical to
the successful implementation of fiscal reform. The pioneers of financial sector

reforms called for early solution of this problem. Therefore, the Government of

India constituted a committee under the Chairmanship of Shri T. Tiwari to examine

the legal and other difficulties faced by banks and financial institutions in the

recovery of their dues and suggest remedial measures. The Tiwari Committee noted

that the existing procedure for recovery was very cumbersome and suggested that

special tribunals be set up for recovery of the dues of banks and financial institutions

by following a summary procedure. The Tiwari Committee also prepared a draft of

the proposed legislation which contained a provision for disposal of cases in three

months and conferment of power upon the recovery officer for expeditious execution

of orders made by adjudicating bodies. The issue was further examined by the

Committee on the Financial System headed by Shri M. Narasimham. In its first

report, Narasimham Committee also suggested setting up of special tribunals with

special powers for adjudication of cases involving the dues of banks and financial

institutions. Even in regard to priority among creditors, Narasimham Committee

made the following suggestion:

“The Adjudication Officer will have such power to distribute the
sale proceeds to the banks and financial institutions being secured
creditors, in accordance with inter se agreement/arrangement
between them and to the other persons entitled thereto in
accordance with the priorities in the law.”

 

17. After considering the reports of two Committees and taking cognizance of

the fact that as on 30th September, 1990 more than 15 lakhs cases filed by public

sector banks and 304 cases filed by financial institutions were pending in various

courts for recovery of debts etc. amounting to Rs.6,000 crores, the Central

Government introduced “The Recovery of Debts Due to Banks and Financial

Institutions Bill, 1993” in Lok Sabha on 13.5.1993. It, however, appears that before

the Bill could be passed, Lok Sabha was adjourned. Therefore, the President of
India in exercise of the powers conferred by Article 123(1) of the Constitution,

promulgated “The Recovery of Debts Due to Banks and Financial Institutions

Ordinance, 1993”, which was replaced by the DRT Act. The new legislation

facilitated creation of specialized forums, i.e., the Debts Recovery Tribunals and

Debts Recovery Appellate Tribunals for expeditious adjudication of disputes relating

to recovery of the debts due to banks and financial institutions. Simultaneously, the

jurisdiction of the civil courts was barred and all pending matters were transferred

to the Tribunals from the date of their establishment. For some years, the new

dispensation of adjudication worked well. However, with the passage of time,

proceedings before the Debts Recovery Tribunals also started getting bogged down

due to invoking of technicalities by the borrowers. Faced with this situation, the

Government again asked the Narasimham Committee to suggest measures for

expediting recovery of debts etc. due to banks and financial institutions. In its 2nd

Report, Narasimham Committee observed that the non-performing assets of most of

the public sector banks were abnormally high and the existing mechanism for

recovery of the same was wholly insufficient. In Chapter VIII of the report, the

Committee observed that the evaluation of legal frame work has not kept pace with

the changing commercial practice and financial sector reforms and as a result of this

the economy has not been able to reap full benefits of the reform process. By way of

illustration, the Committee referred to the scheme of mortgage under the Transfer of

Property Act and suggested that the existing laws should be changed not only for

facilitating speedy recovery of the dues of banks etc. but also for quick resolution of

disputes arising out of the action taken for recovery of such dues. Andhyarujina

Committee constituted by the Central Government for examining banking sector

reforms also considered the need for changes in the legal system. Both Narasimham

and Andhyarujina Committees suggested enactment of new legislation for

securitisation and empowering the banks and financial institutions to take possession
of the securities and sell them without intervention of the court. In the backdrop of

these recommendations, the Parliament enacted the Securitisation Act.
Scheme of the DRT Act and Rules made thereunder

 

18. Section 2(g) of the DRT Act (as it stood before being amended by Act No.

30/2004) defined “debt” as – “any liability (inclusive of interest) which is alleged as

due from any person by a bank or a financial institution or by a consortium of banks

or financial institutions during the course of any business activity undertaken by

bank or financial institution or the consortium under any law for the time being in

force, in cash or otherwise, whether secured or unsecured, or whether payable under

a decree or order of any civil court or otherwise and subsisting on, and legally

recoverable on, the date of the application.” After the amendment of 2004, “debt”

means “any liability (inclusive of interest) which is alleged as due from any person by

a bank or a financial institution or by a consortium of banks or financial institutions

during the course of any business activity undertaken by the bank or the financial

institution or the consortium under any law for the time being in force, in cash or

otherwise, whether secured or unsecured, or assigned, or whether payable under a

decree or order of any civil court or any arbitration award or otherwise or under a

mortgage and subsisting on, and legally recoverable on, the date of the application.”

The provisions contained in Chapter II envisage establishment of the Debts Recovery

Tribunals and the Debts Recovery Appellate Tribunals, qualifications of Presiding

Officers and Members, term of their office, staff of the tribunals, salaries, allowances,

etc. Section 17(1) of the DRT Act declares that a Tribunal shall have the jurisdiction,

powers and authority to entertain and decide applications made by banks and

financial institutions for recovery of debts due to them. Under Section 17(2), the

Appellate Tribunal has been vested with jurisdiction, powers and authority to

entertain appeal against any order made or deemed to have been made by a
Tribunal. Section 18 expressly bars the jurisdiction, powers and authority of all

courts except the Supreme Court and a High Court exercising jurisdiction under

Articles 226 and 227 of the Constitution of India in relation to matters specified in

Section 17. Section 19, which finds place in Chapter IV of the DRT Act contains

procedure required to be followed by the Tribunal for deciding an application made

for recovery of debt. It envisages making of application by a bank or a financial

institution for recovery of any debt from any person, issue of summons to the

defendant to show cause as to why relief prayed for may not be granted to the

applicant and also provides for passing of appropriate orders. By amending Act

No.30/2004, three provisos were inserted in Section 19(1). In terms of first proviso, a

bank or a financial institution can, after obtaining permission of the DRT, withdraw

the original application for the purpose of taking action under the Securitisation Act.

Second proviso lays down that an application for withdrawal filed under first proviso

must be disposed of within 30 days. The third proviso requires recording of reasons

in case the Tribunal refuses permission or leave for withdrawal of application under

Section 19(1). Section 19(6) provides for the defendant’s claim to set-off against the

bank’s demand for a certain sum of money. Section 19(8) gives right to the

defendant to set up a counter claim. Section 19(12) empowers the Tribunal to make

an interim order by way of injunction, stay or attachment before judgment debarring

the defendant from transferring, alienating or otherwise dealing with, or disposing

of, his properties and assets. Under Section 19(13), the Tribunal is empowered to

direct the defendant to furnish security where it is satisfied that the defendant is

likely to dispose of the property or cause damage to the property in order to defeat

the decree which may ultimately be passed in favour of bank or financial institution.

Section 19(18), empowers the Tribunal to appoint a receiver of any property on the

ground of equity. This can be done before or after grant of certificate for recovery of

debt. Under Section 19(19), a recovery certificate issued against a company can be
enforced by the Tribunal which can order the property to be sold and the sale

proceeds distributed amongst the secured creditors in accordance with the provisions

of Section 529A of the Companies Act, 1956 and pay the balance/surplus, if any, to

the debtor-company. Section 20(1) lays down that any person aggrieved by an order

made, or deemed to have been made, by a Tribunal may prefer an appeal to the

Appellate Tribunal. Sub-section (2) of Section 20 declares that no appeal shall lie

from an order made by the Tribunal with the consent of the parties. Sub-section (3)

prescribes the period of limitation i.e. 45 days. Proviso to this sub-section empowers

the Tribunal to entertain an appeal after the expiry of 45 days if it is satisfied that

there was sufficient cause for not filing the appeal within the prescribed period. Sub-

sections (4) to (6) contain the procedure to be followed by the Appellate Tribunal for

disposal of an appeal. Section 21 lays down that the Appellate Tribunal shall not

entertain an appeal unless the person preferring appeal deposits 75 per cent of the

amount determined by the Tribunal under Section 19. Section 22 lays down that the

Tribunal and the Appellate Tribunal shall not be bound by the procedure contained

in the Code of Civil Procedure, but shall be guided by the principles of natural justice

and subject to the other provisions of the Act or rules made thereunder, the Tribunal

and the Appellate Tribunal shall be free to regulate their own procedure. Section 25

specifies three modes of recovery of debt, namely, (a) attachment and sale, (b) arrest

of the defendant and (c) appointment of a receiver for the management of the

properties of the defendant. Other modes of recovery are specified in Section 28

which states that where a certificate has been issued by the Tribunal under Section

19(7), the Recovery Officer may, without prejudice to the modes of recovery specified

in Section 25, recover the amount of debt by any one or more of the modes mentioned

in Section 28. By Section 29, the provisions of Second and Third Schedules to the

Income Tax Act, 1961 and the Income Tax (Certificate Proceedings) Rules, 1962 have

been made applicable to the recovery proceedings. Section 31(1) states that every suit
or other proceeding pending before any court immediately before the date of

establishment of a Tribunal, shall stand transferred to the Tribunal if the subject

matter thereof would have been within its jurisdiction had the cause of action arisen

after establishment of the Tribunal. Section 31A lays down that where a decree or

order was passed by any court before the commencement of the Recovery of Debts

Due to Banks and Financial Institutions (Amendment) Act, 2000 and the same had

not been executed, then the decree-holder can apply to the Tribunal for recovery of

the amount. Sub-section (1) of Section 34 contains a non obstante clause and declares

that save as otherwise provided in sub-section (2), provisions of the DRT Act shall

have effect notwithstanding anything inconsistent therewith contained in any other

law for the time being in force or in any instrument having effect by virtue of any law

other than that Act. Amended sub-section (2) of Section 34 lays down that the

provisions of the DRT Act or rules made thereunder shall be in addition to and not in

derogation of Industrial Finance Corporation Act, 1948, The State Financial

Corporation Act, 1951, The Unit Trust of India Act, 1963, Industrial Reconstruction

Bank of India Act, 1984 and the Small Industries Development Bank of India Act,

1989.

 

19. In exercise of the power conferred upon it under Section 36 of the DRT

Act, the Central Government has framed the Debts Recovery Tribunal (Procedure)

Rules, 1993. These rules regulate the procedure for filing application in the

prescribed form, scrutiny thereof, fee for application, contents of application,

documents to be filed with the application, filing of reply and documents by the

respondent, date and place of hearing of the application, the manner of recording the

order, publication of order and communication thereof to the parties. By an

amendment made in 1997, Rule 5A was added to enable a party to apply for review

of the order made by the Tribunal on the ground of some mistake or error apparent
on the face of the record. For regulating the procedure of the Appellate Tribunal, the

Central Government has framed the Debts Recovery Appellate Tribunal (Procedure)

Rules, 1994. The provisions contained in these rules are similar to those contained in

the rules regulating the procedure of the Tribunal.
Scheme of the Securitisation Act and Rules made thereunder
20. Section 2(b) defines “asset reconstruction” to mean acquisition by any

Securitisation company or reconstruction company of any right or interest of any

bank or financial institution in any financial assistance for the purpose of realisation

of such financial assistance. Section 2(f) defines the word “borrower” to mean, any

person who has been granted financial assistance by any bank or financial institution

or who has given any guarantee or created any mortgage or pledge as security for the

financial assistance granted by any bank or financial institution. It includes a

person who becomes borrower of a securitisation company or reconstruction

company consequent upon acquisition by it of any right or interest of any bank or

financial institution in relation to such financial assistance. Section 2(ha) declares

that “debt” shall have the meaning assigned to it in clause (g) of Section 2 of the DRT

Act. Section 2(k) defines “financial assistance” to mean any loan or advance or any

debentures or bonds subscribed or any guarantees given or letters of credit

established or any other credit facility extended by any bank or financial institution.

Section 2(l) defines “financial asset” to mean any debt or receivables and includes a

claim to any debt or receivables or part thereof, whether secured or unsecured or any

debt or receivables secured by, mortgage of, or charge on, immovable property, or a

mortgage, charge, hypothecation or pledge of movable property or any right or

interest in the security, whether full or part underlying such debt or receivables or

any beneficial interest in property, whether movable or immovable, or in such debt,

receivables, whether such interest is existing, future, accruing, conditional or
contingent or any financial assistance. Section 2(n) defines “hypothecation” to mean

a charge created by a borrower in favour of a secured creditor as a security for

financial assistance. Section 2(o) defines “non-performing asset” to mean an asset or

account of a borrower which has been classified by a bank or financial institution as

sub-standard, doubtful or loss asset. Section 2(z) defines “Securitisation” to mean

acquisition of financial assets by any securitisation company or reconstruction

company from any originator whether by raising of funds by such securitisation

company or reconstruction company from qualified institutional buyers by issue of

security receipts representing undivided interest in such financial assets or otherwise.

Section 2(zc) defines “secured asset” to mean the property on which security interest

is created. Section 2(zd) defines “secured creditor” to mean any bank or financial

institution or any consortium or group of banks or financial institutions and includes

(i) debenture trustee appointed by any bank or financial institutions, or (ii)

securitisation company or reconstruction company, whether acting as such or

managing a trust set up by such securitization company or reconstruction company

for the securitisation or reconstruction, as the case may be, or (iii) any other trustee

holding securities on behalf of a bank or financial institution, in whose favour

security interest is created for due repayment by any borrower of any financial

assistance. Section 2(ze) defines a “secured debt” to mean a debt which is secured by

any security interest. Section 2(zf) defines “security interest” to mean right, title and

interest of any kind whatsoever upon property, created in favour of any secured

creditor and includes any mortgage, charge, hypothecation and assignment.”

Chapter II which contains Sections 3 to 12 deals with regulation of

securitisation and reconstruction of financial assets of banks and financial

institutions. Chapter III deals with enforcement of security interest. It comprises of

seven sections including Section 13 which is crucial for decision of these appeals.

Sub-section (1) of Section 13 contains a non obstante clause. It lays down that
notwithstanding anything contained in Sections 69 or 69A of the Transfer of

Property Act, any security interest created in favour of any secured creditor may be

enforced, without the intervention of the Court or Tribunal, by such creditor in

accordance with the provisions of this Act. Sub-section (2) of Section 13

enumerates first of many steps needed to be taken by the secured creditor for

enforcement of security interest. This sub-section provides that if a borrower, who is

under a liability to a secured creditor, makes any default in repayment of secured

debt and his account in respect of such debt is classified as non-performing asset,

then the secured creditor may require the borrower by notice in writing to discharge

his liabilities within sixty days from the date of the notice with an indication that if he

fails to do so, the secured creditor shall be entitled to exercise all or any of its rights

in terms of Section 13(4). Sub-section (3) of Section 13 lays down that notice issued

under Section 13(2) shall contain details of the amount payable by the borrower as

also the details of the secured assets intended to be enforced by bank or financial

institution. Sub-section (3-A) of Section 13 lays down that the borrower may make a

representation in response to the notice issued under Section 13(2) and challenge the

classification of his account as non-performing asset as also the quantum of amount

specified in the notice. If the bank or financial institution comes to the conclusion

that the representation/objection of the borrower is not acceptable, then reasons for

non acceptance are required to be communicated within one week. Sub-section (4) of

Section 13 specifies various modes which can be adopted by the secured creditor for

recovery of secured debt. The secured creditor can take possession of the secured

assets of the borrower and transfer the same by way of lease, assignment or sale for

realizing the secured assets. This is subject to the condition that the right to transfer

by way of lease etc. shall be exercised only where substantial part of the business of

the borrower is held as secured debt. If the management of whole or part of the

business is severable, then the secured creditor can take over management only of
such business of the borrower which is relatable to security. The secured creditor

can appoint any person to manage the secured asset, the possession of which has been

taken over. The secured creditor can also, by notice in writing, call upon a person

who has acquired any of the secured assets from the borrower to pay the money,

which may be sufficient to discharge the liability of the borrower. Sub-section (7) of

Section 13 lays down that where any action has been taken against a borrower under

sub-section (4), all costs, charges and expenses properly incurred by the secured

creditor or any expenses incidental thereto can be recovered from the borrower. The

money which is received by the secured creditor is required to be held by him in trust

and applied, in the first instance, for such costs, charges and expenses and then in

discharge of dues of the secured creditor. Residue of the money is payable to the

person entitled thereto according to his rights and interest. Sub-section (8) imposes a

restriction on the sale or transfer of the secured asset if the amount due to the secured

creditor together with costs, charges and expenses incurred by him are tendered at

any time before the time fixed for such sale or transfer. Sub-section (9) deals with the

situation in which more than one secured creditor has stakes in the secured assets

and lays down that in the case of financing a financial asset by more than one secured

creditor or joint financing of a financial asset by secured creditors, no individual

secured creditor shall be entitled to exercise any or all of the rights under sub-section

(4) unless all of them agree for such a course. There are five unnumbered provisos to

Section 13(9) which deal with pari passu charge of the workers of a company in

liquidation. The first of these provisos lays down that in the case of a company in

liquidation, the amount realized from the sale of secured assets shall be distributed in

accordance with the provisions of Section 529A of the Companies Act, 1956. The

second proviso deals with the case of a company being wound up on or after the

commencement of this Act. If the secured creditor of such company opts to realize its

security instead of relinquishing the same and proving its debt under Section 529(1)
of the Companies Act, then it can retain sale proceeds after depositing the workmen’s

dues with the liquidator in accordance with Section 529A. The third proviso requires

the liquidator to inform the secured creditor about the dues payable to the workmen

in terms of Section 529A. If the amount payable to the workmen is not certain, then

the liquidator has to intimate the estimated amount to the secured creditor. The

fourth proviso lays down that in case the secured creditor deposits the estimated

amount of the workmen’s dues, then such creditor shall be liable to pay the balance

of the workmen’s dues or entitled to receive the excess amount, if any, deposited with

the liquidator. In terms of fifth proviso, the secured creditor is required to give an

undertaking to the liquidator to pay the balance of the workmen’s dues, if any. Sub-

section (10) lays down that where dues of the secured creditor are not fully satisfied

by the sale proceeds of the secured assets, the secured creditor may file an application

before the Tribunal under Section 17 for recovery of balance amount from the

borrower. Sub-section (11) states that without prejudice to the rights conferred on

the secured creditor under or by this section, it shall be entitled to proceed against

the guarantors or sell the pledged assets without resorting to the measures specified

in clauses (a) to (d) of sub-section (4) in relation to the secured assets. Sub-section

(12) lays down that rights available to the secured creditor under the Act may be

exercised by one or more of its officers authorised in this behalf. Sub-section (13)

lays down that after receipt of notice under sub-section (2), the borrower shall not

transfer by way of sale, lease or otherwise (other than in the ordinary course of his

business) any of his secured assets referred to in the notice without prior written

consent of the secured creditor. Section 14 represents semblance of court’s

intervention by way of assistance to a secured creditor in taking possession of the

secured asset. The secured creditor can, for the purpose of taking possession or

control of any secured asset, request in writing to the Chief Metropolitan Magistrate

or the District Magistrate within whose jurisdiction the secured asset or other
document relating thereto is situated or found to take possession thereof. If such

request is made, the Chief Metropolitan Magistrate or the District Magistrate, as the

case may be, is obliged to take possession of such asset and document and forward

the same to the secured creditor. Section 17 speaks of the remedies available to any

person including borrower who may feel aggrieved by the action taken by the

secured creditor under sub-section (4) of Section 13. Such an aggrieved person can

make an application to the Tribunal within 45 days from the date on which action is

taken under that sub-section. By way of abundant caution, an explanation has been

added to Section 17(1) and it has been clarified that the communication of reasons to

the borrower in terms of Section 13(3A) shall not constitute a ground for filing

application under Section 17(1). Sub-section (2) of Section 17 casts a duty on the

Tribunal to consider whether the measures taken by the secured creditor for

enforcement of security interest are in accordance with the provisions of the Act and

rules made thereunder. If the Tribunal, after examining the facts and circumstances

of the case and evidence produced by the parties, comes to the conclusion that the

measures taken by the secured creditor are not in consonance with sub-section (4) of

Section 13, then it can direct the secured creditor to restore management of the

business or possession of the secured assets to the borrower. On the other hand, if

the Tribunal finds that the recourse taken by the secured creditor under sub-section

(4) of Section 13 is in accordance with the provisions of the Act and the rules made

thereunder, then, notwithstanding anything contained in any other law for the time

being in force, the secured creditor can take recourse to one or more of the measures

specified in Section 13(4) for recovery of its secured debt. Sub-section (5) of Section

17 prescribes the time limit of sixty days within which an application made under

Section 17 is required to be disposed of. Proviso to this sub-section envisages

extension of time, but the outer limit for adjudication of an application is four

months. If the Tribunal fails to decide the application within a maximum period of
four months, then either party can move the Appellate Tribunal for issue of a

direction to the Tribunal to dispose of the application expeditiously. Section 18

provides for an appeal to the Appellate Tribunal. Section 34 lays down that no civil

court shall have jurisdiction to entertain any suit or proceeding in respect of any

matter which a Tribunal or Appellate Tribunal is empowered to determine. It

further lays down that no injunction shall be granted by any court or other authority

in respect of any action taken or to be taken under the Securitisation Act or DRT Act.

Section 35 of the Securitisation Act is substantially similar to Section 34(1) of the

DRT Act. It declares that the provisions of this Act shall have effect notwithstanding

anything inconsistent therewith contained in any other law for the time being in force

or any instrument having effect by virtue of any such law. Section 37, which is

similar to Section 34(2) of the DRT Act lays down that the provisions of this Act or

the Rules made thereunder shall be in addition to, and not in derogation of, the

Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the Securities

and Exchange Board of India Act, 1992, the Recovery of Debts Due to Banks and

Financial Institutions Act, 1993 or any other law for the time being in force.

 

21. In exercise of powers vested in it under Sections 38(1) and (2)(b) read with

Sections 13(4), (10) and (12) of the Securitisation Act, the Central Government

framed the Security Interest (Enforcement) Rules, 2002. Rule 3 prescribes the mode

of service of demand notice. Rule 4 details the procedure to be followed after issue of

demand notice. Various sub-rules of

this rule specify the mode of taking possession of moveable security assets, their

preservation and protection, valuation and sale. Rule 8 lays down similar procedure

in respect of immovable security assets. Rule 9 regulates time of sale, issue of sale

certificate and delivery of possession to the purchaser. Rule 10 provides for

appointment of manager of the security assets of which possession has been taken
over by the secured creditor. Rule 11 regulates procedure for recovery of shortfall of

secured debt.

 

22. An analysis of the above noted provisions makes it clear that the primary

object of the DRT Act was to facilitate creation of special machinery for speedy

recovery of the dues of banks and financial institutions. This is the reason why the

DRT Act not only provides for establishment of the Tribunals and Appellate

Tribunals with the jurisdiction, powers and authority to make summary adjudication

of applications made by banks or financial institutions and specifies the modes of

recovery of the amount determined by the Tribunal or Appellate Tribunal but also

bars the jurisdiction of all courts except the Supreme Court and High Courts in

relation to the matters specified in Section 17. The Tribunals and Appellate

Tribunals have also been freed from the shackles of procedure contained in the Code

of Civil Procedure. To put it differently, the DRT Act has not only brought into

existence special procedural mechanism for speedy recovery of the dues of banks and

financial institutions, but also made provision for ensuring that defaulting borrowers

are not able to invoke the jurisdiction of civil courts for frustrating the proceedings

initiated by the banks and financial institutions.

 

23. The enactment of the Securitisation Act can be treated as one of the most

radical legislative measures taken by the Government for ensuring that dues of

secured creditors including banks, financial institutions are recovered from the

defaulting borrowers without any obstruction. For the first time, the secured

creditors have been empowered to take measures for recovery of their dues without

the intervention of the Courts or Tribunals. The Securitisation Act has also brought

into existence a new dispensation for registration and regulation of securitisation

companies or reconstruction companies, facilitating securitisation of financial assets
of banks and financial institutions, easy transferability of financial assets by the

securitisation company or reconstruction company to acquire financial assets of

banks and financial institutions by issue of debentures or bonds or any other security

in the nature of debenture, empowering the securitisation companies or

reconstruction companies to raise funds by issue of security receipts to qualified

institutional buyers, facilitating reconstruction of financial assets acquired by

exercising power of enforcement of securities or change of management, declaration

of any securitisation company or reconstruction company as a public financial

institution for the purpose of Section 4A of the Companies Act, defining `security

interest’ as any type of security including mortgage and charge on immovable

properties given for due payment of any financial assistance given by any bank or

financial institution, classification of borrowers account as non-performing asset and

above all empowering banks and financial institutions to take possession of securities

given for financial assistance and sale or lease the same or take over management.

 

24. In the light of the above, we shall now consider whether there is any

conflict between the DRT Act and Securitisation Act on one hand and the Bombay

and Kerala Acts and similar State legislations on the other, and whether by virtue of

non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the

Securitisation Act, the provisions contained in those legislations override Section 38C

of the Bombay Act, Section 26B of the Kerala Act and similar other State legislations.

For reference sake, these provisions are reproduced below:

DRT Act

“34. Act to have over-riding effect.–(1) Save as otherwise
provided in sub-section (2), the provisions of this Act shall have
effect notwithstanding anything inconsistent therewith contained
in any other law for the time being in force or in any instrument
having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made
thereunder shall be in addition to, and not in derogation of, the
Industrial Finance Corporation Act, 1948 (15 of 1948), the State
Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of
India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank
of India Act, 1984 (62 of 1984), the Sick Industrial Companies
(Special Provisions) Act, 1985 and the Small Industries
Development Bank of India Act, 1989.”

Securitisation Act

“35. The provisions of this Act to override other laws.-The
provisions of this Act shall have effect, notwithstanding anything
inconsistent therewith contained in any other law for the time
being in force or any instrument having effect by virtue of any
such law.”

37. Application of other laws not barred.–The provisions of this
Act or the rules made thereunder shall be in addition to, and not
in derogation of, the Companies Act, 1956 (1 of 1956), the
Securities Contracts (Regulation) Act, 1956 (42 of 1956), the
Securities and Exchange Board of India Act, 1992 (15 of 1992),
the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (51 of 1993) or any other law for the time being in
force.”

Bombay Sales Tax Act, 1959

“38C. Liability Under this Act to be First Charge-
Notwithstanding anything contained in any contract to the
contrary but subject to any provision regarding first charge in
any Central Act for the time being in force, any amount of tax,
penalty, interest or any other sum, payable by a dealer or any
other person under this Act shall be the first charge on the
property of the dealer, or, as the case may be, person.”

Kerala General Sales Tax Act, 1963

“26B. Tax payable to be first charge on the property.–
Notwithstanding anything to the contrary contained in any other
law for the time being in force, any amount of tax, penalty,
interest and any other amount, if any, payable by a dealer or any
another person under this Act, shall be the first charge on the
property of the dealer, or such person.”
Section 14A of the Workmen’s Compensation Act, 1923, Section 11 of the Employees’

Provident Funds and Miscellaneous Provisions Act, 1952 (for short `the EPF Act’),

Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals

(Development and Regulation) Act, 1957, Section 30 of the Gift Tax Act, 1958 and

Section 529A of the Companies Act, 1956 are some of the Central legislations by
which statutory first charge has been created in favour of the State or workers, read

as under:-

Workmen’s Compensation Act, 1923
“14A. Compensation to be first charge on assets transferred
by employer.- Where an employer transfers his assets before any
amount due in respect of any compensation, the liability wherefor
accrued before the date of the transfer, has been paid, such
amount shall, notwithstanding anything contained in any other
law for the time being in force, be a first charge on that part of the
assets so transferred as consists of immovable property.”
Employees’ Provident Funds and Miscellaneous Provisions Act,
1952
“11. Priority of payment of contributions over other debts.-
(1) Where any employer is adjudicated insolvent or, being a
company, an order for winding up is made, the amount due-
(a) from the employer in relation to an establishment to
which any Scheme or the Insurance Scheme applies in respect of
any contribution payable to the Fund or, as the case may be, the
Insurance Fund, damages recoverable under section 14B,
accumulations required to be transferred under sub-section (2) of
section 15 or any charges payable by him under any other
provision of this Act or of any provision of the Scheme or the
Insurance Scheme; or
(b) from the employer in relation to an exempted
establishment in report of any contribution to the provident fund
or any insurance fund in so far it relates to exempted employees,
under the rules of the provident fund or any insurance fund, any
contribution payable by him towards the Pension Fund under
sub-section (6) of section 17, damages recoverable under section
14B or any charges payable by him to the appropriate
Government under any provision of this Act or under any of the
conditions specified under section 17,
shall, where the liability therefor has accrued before the order of
adjudication or winding up is made, be deemed to be included
among the debts which under section 49 of the Presidency-towns
Insolvency Act, 1909 (3 of 1909), or under section 61 of the
Provincial Insolvency Act, 1920 (5 of 1920), or under section 530
of the Companies Act, 1956 (1 of 1956) are to be paid in priority to
all other debts in the distribution of the property of the insolvent
or the assets of the company being wound up, as the case may be.
Explanation. – In this sub-section and in section 17, “insurance
fund” means any fund established by an employer under any
scheme for providing benefits in the nature of life insurance to
employees, whether linked to their deposits in provident fund or
not, without payment by the employees of any separate
contribution or premium in that behalf.
11(2) Without prejudice to the provisions of sub-section (1),
if any amount is due from an employer, whether in respect of the
employee’s contribution deducted from the wages of the employee
or the employer’s contribution, the amount so due shall be deemed
to be the first charge on the assets of the establishment, and shall,
notwithstanding anything contained in any other law, for the time
being in force, be paid in priority to all other debts.”
Estate Duty Act, 1953
“74(1). Estate duty a first charge on property liable thereto.- (1)
Subject to the provisions of section 19, the estate duty payable in
respect of property, movable or immovable, passing on the death
of the deceased, shall be a first charge on the immovable property
so passing (including agricultural land) in whomsoever it may vest
on his death after the debts and encumbrances allowable under
Part VI of this Act; and any private transfer or delivery of such
property shall be void against any claim in respect of such estate
duty.”
Mines and Minerals (Development and Regulation) Act, 1957
“25(2). Any rent, royalty, tax, fee or other sum due to the
Government either under this Act or any rule made thereunder or
under the terms and conditions of any reconnaissance permit,
prospecting licence or mining lease may, on a certificate of such
officer as may be specified by the State Government in this behalf
by general or special order, be recovered in the same manner as if
it were an arrear of land revenue and every such sum which
becomes due to the Government after the commencement of the
Mines and Minerals (Regulation and Development) Amendment
Act, 1972, together with the interest due thereon shall be a first
charge on the assets of the holder of the reconnaissance permit,
prospecting licence or mining lease, as the case may be.”

 

Gift-Tax Act (18 of 1958)

“30. Gift-tax to be charged on property gifted. – Gift-tax payable
in respect of any gift comprising immovable property shall be a
first charge on that property but any such charge shall not affect
the title of a bona fide purchaser for valuable consideration
without notice of the charge.”
Companies Act, 1956:

“529A. Overriding preferential payments.– Notwithstanding
anything contained in any other provision of this Act or any other
law for the time being in force, in the winding up of a company –

(a) workmen’s dues; and
(b) debts due to secured creditors to the extent such debts
rank under clause (c) of the proviso to sub-section (1) of section
529 pari passu with such dues,

shall be paid in priority to all other debts.

(2) the debts payable under clause (a) and clause (b) of
sub-section (1) shall be paid in full, unless the assets are
insufficient to meet them, in which case they shall abate in equal
proportions.”
Section 46B of the State Financial Corporations Act, 1951 (for short `the SFC Act’)

which contains a non obstante clause similar to the one contained in Section 34(1) of

the DRT Act and Section 35 of the Securitisation Act and the effect of which was

considered by a Division Bench of the Kerala High Court vis a vis Section 11(2) of the

EPF Act also read as under:-
State Financial Corporations Act, 1951

“46B. Effect of Act on other laws.- The provisions of this
Act and of any rules or orders made thereunder shall have effect
notwithstanding anything inconsistent therewith contained in any
other law for the time being in force or in the memorandum or
articles of association of an industrial concern or in any other
instrument having effect by virtue of any law other than this Act,
but save as aforesaid, the provisions of this Act shall be in
addition to, and not in derogation of, any other law for the time
being applicable to an industrial concern.”

 

25. As a prelude to the consideration of question relating to conflict between

Central and State legislations and priority, if any, given to the dues of banks,

financial institutions and other secured creditors under the DRT Act and

Securitisation Act, it will be useful to notice some rules of interpretation of statutes,

one of which is the rule of contextual interpretation. This rule requires that the court

should examine every word of a statute in its context. In doing so, the Court has to

keep in view preamble of the statute, other provisions thereof, pari materia statutes, if

any, and the mischief intended to be remedied. Context often provides the key to the
meaning of the word and the sense it carries. Its setting gives colour to it and

provides a cue to the intention of the legislature in using it. In his famous work on

Statutory Interpretation, Justice G.P. Singh has quoted Professor H.A. Smith in the

following words:

“`No word’, says Professor H.A. Smith `has an absolute meaning,
for no words can be defined in vacuo, or without reference to
some context’. According to Sutherland there is a `basic fallacy’ in
saying `that words have meaning in and of themselves’, and
`reference to the abstract meaning of words’, states Craies, `if
there be any such thing, is of little value in interpreting statutes’.
… in determining the meaning of any word or phrase in a statute
the first question to be asked is — `What is the natural or
ordinary meaning of that word or phrase in its context in the
statute? It is only when that meaning leads to some result which
cannot reasonably be supposed to have been the intention of the
legislature, that it is proper to look for some other possible
meaning of the word or phrase.’ The context, as already seen in
the construction of statutes, means the statute as a whole, the
previous state of the law, other statutes in pari materia, the
general scope of the statute and the mischief that it was intended
to remedy.”
In Poppatlal Shah v. State of Madras [AIR 1953 SC 274], this Court while construing

the word `sale’ appearing in the Madras General Sales Tax Act, 1939 before its

amendment in 1947, observed: “it is a settled rule of construction that to ascertain the

legislative intent, all the constituent parts of a statutes are to be taken together, and

each word, phrase or sentence is to be considered in the light of the general purpose

of the Act itself”.

 

26. In Reserve Bank of India v. Peerless General Finance and Investment

Company Limited [(1987) 1 SCC 424], it was observed, “that interpretation is best

which makes the textual interpretation match the contextual.” Speaking for the

Court, Chinappa Reddy, J. noted the importance of rule of contextual interpretation

and held:-
“Interpretation must depend on the text and the context. They are
the bases of interpretation. One may well say if the text is the
texture, context is what gives the colour. Neither can be ignored.
Both are important. That interpretation is best which makes the
textual interpretation match the contextual. A statute is best
interpreted when we know why it was enacted. With this
knowledge, the statute must be read, first as a whole and then
section by section, clause by clause, phrase by phrase and word by
word. If a statute is looked at, in the context of its enactment, with
the glasses of the statute-maker, provided by such context, its
scheme, the sections, clauses, phrases and words may take colour
and appear different than when the statute is looked at without
the glasses provided by the context. With these glasses we must
look at the Act as a whole and discover what each section, each
clause, each phrase and each word is meant and designed to say as
to fit into the scheme of the entire Act. No part of a statute and no
word of a statute can be construed in isolation. Statutes have to be
construed so that every word has a place and everything is in its
place. It is by looking at the definition as a whole in the setting of
the entire Act and by reference to what preceded the enactment
and the reasons for it that the Court construed the expression
`prize chit’ in Srinivasa [(1980) 4 SCC 507] and we find no reason
to depart from the Court’s construction.”

 

27. In R. v. National Asylum Support Services [(2002) 4 All ER 654], LORD

STEYN observed “the starting point is that language in all legal texts conveys

meaning according to the circumstances in which it was used. It follows that context

must always be identified and considered before the process of construction or

during it. It is, therefore, wrong to say that the court may only resort to the evidence

of contextual scene when an ambiguity has arisen.”

 

28. A non obstante clause is generally incorporated in a statute to give

overriding effect to a particular section or the statute as a whole. While interpreting

non obstante clause, the Court is required to find out the extent to which the

legislature intended to do so and the context in which the non obstante clause is used.

This rule of interpretation has been applied in several decisions. In State of West

Bengal v. Union of India [(1964) 1 SCR 371], it was observed that the Court must

ascertain the intention of the legislature by directing its attention not merely to the
clauses to be construed but to the entire statute; it must compare the clause with the

other parts of the law and the setting in which the clause to be interpreted occurs.

 

29. In Madhav Rao Jivaji Rao Scindia v. Union of India and another [(1971) 1

SCC 85] Hidayatullah, C.J. observed that the non obstante clause is no doubt a very

potent clause intended to exclude every consideration arising from other provisions

of the same statute or other statute but “for that reason alone we must determine the

scope” of that provision strictly. When the section containing the said clause does not

refer to any particular provisions which it intends to override but refers to the

provisions of the statute generally, it is not permissible to hold that it excludes the

whole Act and stands all alone by itself. A search has, therefore, to be made with a

view to determining which provision answers the description and which does not.

 

30. In R.S. Raghunath v. State of Karnataka and another [(1992) 1 SCC 335],

a three-Judge Bench referred to the earlier judgments in Aswini Kumar Ghose v.

Arabinda Bose [AIR 1952 SC 369], Dominion of India v. Shrinbai A. Irani [AIR 1954

SC 596], Union of India v. G.M. Kokil [1984 (Supp.) SCC 196], Chandavarkar Sita

Ratna Rao v. Ashalata S. Guram [(1986) 4 SCC 447] and observed:

“………The non-obstante clause is appended to a provision with a
view to give the enacting part of the provision an overriding effect
in case of a conflict. But the non-obstante clause need not
necessarily and always be co-extensive with the operative part so
as to have the effect of cutting down the clear terms of an
enactment and if the words of the enactment are clear and are
capable of a clear interpretation on a plain and grammatical
construction of the words the non-obstante clause cannot cut
down the construction and restrict the scope of its operation. In
such cases the non-obstante clause has to be read as clarifying the
whole position and must be understood to have been incorporated
in the enactment by the legislature by way of abundant caution
and not by way of limiting the ambit and scope of the Special
Rules.”

 

31. In A.G. Varadarajulu v. State of Tamil Nadu [(1998) 4 SCC 231], this
Court relied on Aswini Kumar Ghose’s case. The Court while interpreting non

obstante clause contained in Section 21-A of Tamil Nadu Land Reforms (Fixation of

Ceiling on Land) Act, 1961 held :-

“It is well settled that while dealing with a non obstante clause
under which the legislature wants to give overriding effect to a
section, the court must try to find out the extent to which the
legislature had intended to give one provision overriding effect
over another provision. Such intention of the legislature in this
behalf is to be gathered from the enacting part of the section. In
Aswini Kumar Ghose v. Arabinda Bose Patanjali Sastri, J.
observed:
“The enacting part of a statute must, where it is clear, be taken to
control the non obstante clause where both cannot be read
harmoniously;”

 

32. The DRT Act and Securitisation Act were enacted by Parliament in the

backdrop of recommendations made by the expert committees appointed by the

Central Government for examining the causes for enormous delay in the recovery of

dues of banks and financial institutions which were adversely affecting fiscal reforms.

The committees headed by Shri T. Tiwari and Shri M. Narasimham suggested that

the existing legal regime should be changed and special adjudicatory machinery be

created for ensuring speedy recovery of the dues of banks and financial institutions.

Narasimham and Andhyarujina Committees also suggested enactment of new

legislation for securitisation and empowering the banks etc. to take possession of the

securities and sell them without intervention of the Court. The DRT Act facilitated

establishment of two-tier system of Tribunals. The Tribunals established at the first

level have been vested with the jurisdiction, powers and authority to summarily

adjudicate the claims of banks and financial institutions in the matter of recovery of

their dues without being bogged down by the technicalities of the Code of Civil

Procedure. The Securitisation Act drastically changed the scenario inasmuch as it

enabled banks, financial institutions and other secured creditors to recover their dues

without intervention of the Courts or Tribunals. The Securitisation Act also made
provision for registration and regulation of securitisation/reconstruction companies,

securitisation of financial assets of banks and financial institutions and other related

provisions. However, what is most significant to be noted is that there is no provision

in either of these enactments by which first charge has been created in favour of

banks, financial institutions or secured creditors qua the property of the borrower.

Under Section 13(1) of the Securitisation Act, limited primacy has been given to the

right of a secured creditor to enforce security interest vis-`-vis Section 69 or Section

69A of the Transfer of Property Act. In terms of that sub-section, secured creditor

can enforce security interest without intervention of the Court or Tribunal and if the

borrower has created any mortgage of the secured asset, the mortgagee or any person

acting on his behalf cannot sell the mortgaged property or appoint a receiver of the

income of the mortgaged property or any part thereof in a manner which may defeat

the right of the secured creditor to enforce security interest. This provision was

enacted in the backdrop of Chapter VIII of Narasimham Committee’s 2nd Report in

which specific reference was made to the provisions relating to mortgages under the

Transfer of Property Act. In an apparent bid to overcome the likely difficulty faced

by the secured creditor which may include a bank or a financial institution,

Parliament incorporated the non obstante clause in Section 13 and gave primacy to

the right of secured creditor vis a vis other mortgagees who could exercise rights

under Sections 69 or 69A of the Transfer of Property Act. However, this primacy has

not been extended to other provisions like Section 38C of the Bombay Act and

Section 26B of the Kerala Act by which first charge has been created in favour of the

State over the property of the dealer or any person liable to pay the dues of sales tax,

etc. Sub-section (7) of Section 13 which envisages application of the money received

by the secured creditor by adopting any of the measures specified under sub-section

(4) merely regulates distribution of money received by the secured creditor. It does

not create first charge in favour of the secured creditor. By enacting various provisos
to sub-section (9), the legislature has ensured that priority given to the claim of

workers of a company in liquidation under Section 529A of the Companies Act, 1956

vis a vis secured creditors like banks is duly respected. This is the reason why first of

the five unnumbered provisos to Section 13(9) lays down that in the case of a

company in liquidation, the amount realized from the sale of secured assets shall be

distributed in accordance with the provisions of Section 529A of the Companies Act,

1956. This and other provisos do not create first charge in favour of the worker of a

company in liquidation for the first time but merely recognize the existing priority of

their claim under the Companies Act. It is interesting to note that the provisos to

sub-section (9) of Section 13 do not deal with the companies which fall in the category

of borrower but which are not in liquidation or are not being wound up. It is thus

clear that provisos referred to above are only part of the distribution mechanism

evolved by the legislature and are intended to protect and preserve the right of the

workers of a company in liquidation whose assets are subjected to the provisions of

the Securitisation Act and are disposed of by the secured creditor in accordance with

Section 13 thereof.

 

33. The non obstante clauses contained in Section 34(1) of the DRT Act and

Section 35 of the Securitisation Act give overriding effect to the provisions of those

Acts only if there is anything inconsistent contained in any other law or instrument

having effect by virtue of any other law. In other words, if there is no provision in

the other enactments which are inconsistent with the DRT Act or Securitisation Act,

the provisions contained in those Acts cannot override other legislations. Section 38C

of the Bombay Act and Section 26B of the Kerala Act also contain non obstante

clauses and give statutory recognition to the priority of State’s charge over other

debts, which was recognized by Indian High Courts even before 1950. In other

words, these sections and similar provisions contained in other State legislations not
only create first charge on the property of the dealer or any other person liable to pay

sales tax, etc. but also give them overriding effect over other laws. In Builders Supply

Corporation v. Union of India [(1965) 2 SCR 289], the Constitution Bench considered

the question whether tax payable to the Union of India has priority over other debts.

After making a reference to the judgments of the Bombay High Court in Bank of

India v. John Bowman and Ors., [AIR 1955 Bom. 305], Madras High Court in Kaka

Mohammad Ghouse Sahib & Co. v. United Commercial Syndicate and others [(1963)

49 I.T.R. 25] and Manickam Chettiar v. Income-tax Officer, Madura, [(1938) 6 ITR

180], the Court held :

(i) “The Common Law doctrine of the priority of Crown
debts had a wide sweep but the question in the present
appeal was the narrow one whether the Union of India
was entitled to claim that the recovery of the amount of
tax due to it from a citizen must take precedence and
priority over unsecured debts due from the said citizen
to his other private creditors. The weight of authority
in India was strongly in support of the priority of tax
dues.
(ii) The Common Law doctrine on which the Union of
India based its claim in the present proceedings had
been applied and upheld in that part of India which
was known as `British India’ prior to the Constitution.
The rules of Common Law relating to substantive
rights which had been adopted by this country and
enforced by judicial decisions, amount to `law in force’
in the territory of India at the relevant time within the
meaning of Art. 372(1). In that view of the matter, the
contention of the appellant that after the Constitution
was adopted the position of the Union of India in
regard to its claim for priority in the present
proceedings had been alerted could not be upheld.

(iii) The basic justification for the claim for priority of
Government debts rests on the well-recognised principle that the
State is entitled to raise money by taxation, otherwise it will not be
able to function as a sovereign government at all. This
consideration emphasizes the necessity and wisdom of conceding
to the State the right to claim priority in respect of its tax dues.”

 

34. In State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling
Corporation and others [(1995) 2 SCC 19], the Court again recognized the priority of

the State’s statutory first charge under Section 11-AAAA of the Rajasthan Sales

Tax Act, 1954 vis-`-vis claim of the bank to recover its dues from the borrower.
35. In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and others [(2000)

5 SCC 694], the Court reviewed case law on the subject and observed:

“The principle of priority of government debts is founded on the
rule of necessity and of public policy. The basic justification for
the claim for priority of State debts rests on the well-recognised
principle that the State is entitled to raise money by taxation
because unless adequate revenue is received by the State, it would
not be able to function as a sovereign Government at all. It is
essential that as a sovereign, the State should be able to discharge
its primary governmental functions and in order to be able to
discharge such functions efficiently, it must be in possession of
necessary funds and this consideration emphasises the necessity
and the wisdom of conceding to the State, the right to claim
priority in respect of its tax dues (see Builders Supply Corpn.). In
the same case the Constitution Bench has noticed a consensus of
judicial opinion that the arrears of tax due to the State can claim
priority over private debts and that this rule of common law
amounts to law in force in the territory of British India at the
relevant time within the meaning of Article 372(1) of the
Constitution of India and therefore continues to be in force
thereafter. On the very principle on which the rule is founded, the
priority would be available only to such debts as are incurred by
the subjects of the Crown by reference to the State’s sovereign
power of compulsory exaction and would not extend to charges
for commercial services or obligation incurred by the subjects to
the State pursuant to commercial transactions. Having reviewed
the available judicial pronouncements their Lordships have
summed up the law as under:

1. There is a consensus of judicial opinion that the arrears
of tax due to the State can claim priority over private debts.

2. The common law doctrine about priority of Crown
debts which was recognised by Indian High Courts prior to 1950
constitutes “law in force” within the meaning of Article 372(1)
and continues to be in force.

3. The basic justification for the claim for priority of
State debts is the rule of necessity and the wisdom of conceding to
the State the right to claim priority in respect of its tax dues.

4. The doctrine may not apply in respect of debts due to
the State if they are contracted by citizens in relation to
commercial activities which may be undertaken by the State for
achieving socio-economic good. In other words, where the welfare
State enters into commercial fields which cannot be regarded as
an essential and integral part of the basic government functions of
the State and seeks to recover debts from its debtors arising out of
such commercial activities the applicability of the doctrine of
priority shall be open for consideration.”

 

36. In State of M.P. and another v. State Bank of Indore and others [(2002) 10

SCC 441], this Court considered whether statutory first charge created under Section

33-C of the M.P. General Sales Tax Act, 1958 would prevail over the bank’s charge.

The facts of that case show that in 1974, respondent No.2 obtained a term loan from

State Bank of Indore and executed a promissory note and pledged certain machinery

to the bank for securing repayment of loan. Two more loans were taken by

respondent no.2 in 1979. The bank sued respondent No.2 for recovery of its dues.

During the pendency of the litigation, Section 33-C was inserted in the State Act. The

State claimed first charge under Section 33-C upon the machinery of respondent No.2

in lieu of sales tax dues. The trial Court and the High Court declined to accept the

State’s claim. The High Court observed that the bank’s charge on the machinery was

prior to the insertion of Section 33-C in the State Act and the subsequent loans taken

in 1979 do not alter the position in favour of the State. The High Court then

proceeded to hold that the charge created in favour of the bank remain valid and

operative till repayment of the loan. This Court reversed the judgments of the trial

Court and High Court and held:

“Section 33-C creates a statutory first charge that prevails over
any charge that may be in existence. Therefore, the charge
thereby created in favour of the State in respect of the sales tax
dues of the second respondent prevailed over the charge created
in favour of the Bank in respect of the loan taken by the second
respondent. There is no question of retrospectivity here, as, on the
date when it was introduced, Section 33-C operated in respect of
all charges that were then in force and gave sales tax dues
precedence over them.”
37. Section 529A of the Companies Act and Section 11(2) of the EPF Act both

of which are Central legislations also contain non obstante clauses give statutory

recognition to the priority of workers dues over other debts. In Allahabad Bank v.

Canara Bank and another (supra), a two-Judge Bench recognized the priority of

workers dues under Section 529A of the Companies Act over other debts. In

Recovery Officer, Employees Provident Fund v. Kerala Financial Corporation

[(2002) 3 ILR Kerala 4], a Division Bench of Kerala High Court considered the

primacy of first charge created under Section 11(2) of the EPF Act vis-`-vis Section

46B of the SFC Act. The facts of that case were that a company by name M/s.

Darpan Electronics (P) Ltd. had taken loan from the Kerala Financial Corporation

and mortgaged its immovable property for securing repayment. During March 1990

and December 1990, the company defaulted in payment of contributions to the

Employees Provident Fund. It also committed default in repayment of loan. The

Kerala Financial Corporation sold the moveable assets of the company for a sum of

Rs.89,083/-. The recovery officer appointed under the EPF Act made an application

for recovery of provident fund contribution. He also attached 37 cents of land which

had already been mortgaged by the company to the Financial Corporation and

prohibited the bank from transferring the amount of Rs.89,083/- lying in the account

of the company. The Corporation challenged this action by filing writ petition under

Article 226 of the Constitution, which was allowed by the learned Single Judge. The

Division Bench referred to Section 11(2) of the EPF Act and held that the workers

dues will have priority over other debts. Speaking for the Bench, B.N. Srikrishna, CJ

(as he then was) observed as under:

“Sub-section (2) of section 11 of the EPF and MP Act has two
facets. First, it declares that the amount due from the employer
towards contribution under the EPF and MP Act shall be deemed
to be the first charge on the assets of the establishment. Second, it
also declares that notwithstanding anything contained in any
other law for the time being in force, such debt shall be paid in
priority to all other debts. Both these provisions bring out the
intention of the Parliament to ensure the social benefit as
contained in the legislation. There are other provisions in the Act
rendering the amounts of provident fund immune from
attachment of civil court’s decree, which also indicate such
intention of Parliament.”

 

The Division Bench then considered the argument based on Section 100 of the

Transfer of Property Act and observed:

 

“With regard to the argument based on section 100 of the
Transfer of Property Act, the matter is no longer res integra. In
State Bank of Bikaner and Jaipur v. National Iron and Steel
Rolling Corporation and others, this question came up specifically
for consideration of the Supreme Court and the answer given by
the Supreme Court is unmistakably against the first respondent.
That was a case where the State Bank of Bikaner claimed priority
over sales tax arrears due to the State on the ground that it was a
secured creditor. Section 11 AAAA of the Rajasthan Sales Tax
Act declares that any amount of tax, penalty, interest and any
other sum, if any, payable by a dealer, or any other person under
the Act, shall be the first charge on the property of the dealer, or
such person. On behalf of the State Bank of Bikaner, section 100
of the Transfer of Property Act was relied upon to contend that,
since there was a mortgage in favour of the Bank, the Bank would
have precedence over the claim of sales tax dues, which was only
by way of a charge. After analysis of section 100 of the Transfer
of Property Act, and considering the distinction drawn between a
mortgage and charge as discussed in the earlier decision in
Dattatreya Shanker Mote v. Anand Chintaman Datar, it was held
that the expression “transferee of property used in section 100
refers to transferee of entire interest in the property and it does
not cover the transfer of only an interest in the property by way of
a mortgage. It was further held that the charge created under
section 11 AAAA of Rajasthan Sales Tax Act over the property of
the dealer or a person liable to pay sales tax or other dues was
created in respect of the entire interest in respect of the property,
since the section declares the dues of the Sales Tax Department as
a first charge, the first charge would operate over the entire title
of the property which continue with the mortgagor. Therefore,
when a statutory first charge is created on the property of the
dealer, the interest of the mortgage is not excluded from the first
charge. The Supreme Court also relied on Fisher and
Lightwood’s Law of Mortgage, 10th Edn. and the Judgment of the
Appeal Court in Westminister City Council v. Haymarket
Publishing Ltd., and finally concluded that since the statute
created a first charge, it clearly gave priority to the statutory
charge over all other charges on the property including a
mortgage. The expression “first charge” was explained to mean
that, it would cover within its ambit a mortgage also.
Consequently, when a first charge is created by statute, that
charge will have precedence over an existing mortgage.”
The Division Bench negatived the argument that non obstante clause contained in

Section 46B of the SFC Act will override Section 11(2) of the EPF Act by assigning

the following reasons:

 

“The contention of the first respondent based on the overriding
effect of section 46 B of the S.F.C. Act has no substance in our
judgment. Undoubtedly, the intention of Parliament in enacting
section 46 B in the year 1956 was to ensure that a State Financial
Corporation could quickly and effectively recover the amounts
due by taking possession of the property of the defaulter instead
of having resort to the cumbersome method of recovery through a
court of law. While this was the law, Parliament amended section
11 of the E.P.F. and M.P. Act by specifically enacting sub-section
(2) thereof, declaring that the amount due as contribution to the
Employees Provident Fund has first charge on the assets of the
establishment and that, notwithstanding anything contained in
any other law for the time being in force, it shall be paid in
priority against all other debts. In fact, the second facet of section
11(2) of the E.P.F. and M.P. Act goes one step further than what is
provided in section 46-B of S.F.C. Act. The reason for this is
obvious. While the State Financial Corporation would have to be
helped to recover the debts due to it from a defaulting debtor, the
Provident Fund payable to workers is of greater moment, since it
is a matter of terminal social security benefit made available by
statute to the working class. Taking into consideration that E.P.F.
and M.P. Act is a social benefit legislation, and the evil
consequences of Provident Fund dues being defeated by prior
claims of secured or unsecured creditors, the Legislature took
care to declare that irrespective of when a debt is created, the dues
under the E.P.F. and M.P. Act would always remain first charge
and shall be paid first out of the assets of the establishment. We
are also not impressed by the contention of the first respondent
that upon usage of non obstante clause in section 46 B of the
S.F.C. Act. Sub-section (2) of section 11 of E.P.F. Act is of
subsequent date. No doubt, both section 46 B of the S.F.C. Act
and section 11(2) of the E.P.F. and M.P. Act declare their intent
by usage of the non obstante clause. But, since section 11(2) of the
E.P.F. and M.P. Act has been enacted later, we must ascribe to the
Parliament the intention to override the earlier legislation also. It
is, therefore, clear that section 11(2) of the E.P.F. and M.P. Act
overrides all provisions of other enactments including section 46 B
of the S.F.C. Act.”
38. While enacting the DRT Act and Securitisation Act, Parliament was aware

of the law laid down by this Court wherein priority of the State dues was recognized.

If Parliament intended to create first charge in favour of banks, financial institutions

or other secured creditors on the property of the borrower, then it would have

incorporated a provision like Section 529A of the Companies Act or Section 11(2) of

the EPF Act and ensured that notwithstanding series of judicial pronouncements,

dues of banks, financial institutions and other secured creditors should have priority

over the State’s statutory first charge in the matter of recovery of the dues of sales

tax, etc. However, the fact of the matter is that no such provision has been

incorporated in either of these enactments despite conferment of extraordinary

power upon the secured creditors to take possession and dispose of the secured assets

without the intervention of the Court or Tribunal. The reason for this omission

appears to be that the new legal regime envisages transfer of secured assets to private

companies. The definition of “secured creditor” includes

securitisation/reconstruction company and any other trustee holding securities on

behalf of bank/financial institution. The definition of “securitisation company” and

“reconstruction company” in Section 2(v) and (za) shows that these companies may

be private companies registered under Companies Act, 1956 and having a certificate

of registration from the Reserve Bank under Section 3 of Securitisation Act.

Evidently, Parliament did not intend to give priority to the dues of private creditors

over sovereign debt of the State.

 

39. If the provisions of the DRT Act and Securitisation Act are interpreted

keeping in view the background and context in which these legislations were enacted

and the purpose sought to be achieved by their enactment, it becomes clear that the

two legislations, are intended to create a new dispensation for expeditious recovery of
dues of banks, financial institutions and secured creditors and adjudication of the

grievance made by any aggrieved person qua the procedure adopted by the banks,

financial institutions and other secured creditors, but the provisions contained

therein cannot be read as creating first charge in favour of banks, etc. If Parliament

intended to give priority to the dues of banks, financial institutions and other secured

creditors over the first charge created under State legislations then provisions similar

to those contained in Section 14A of the Workmen’s Compensation Act, 1923, Section

11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the

Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift-

Tax Act, and Section 529A of the Companies Act, 1956 would have been incorporated

in the DRT Act and Securitisation Act. Undisputedly, the two enactments do not

contain provision similar to Workmen’s Compensation Act, etc. In the absence of any

specific provision to that effect, it is not possible to read any conflict or inconsistency

or overlapping between the provisions of the DRT Act and Securitisation Act on the

one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on

the other and the non obstante clauses contained in Section 34(1) of the DRT Act and

Section 35 of the Securitisation Act cannot be invoked for declaring that the first

charge created under the State legislation will not operate qua or affect the

proceedings initiated by banks, financial institutions and other secured creditors for

recovery of their dues or enforcement of security interest, as the case may be. The

Court could have given effect to the non obstante clauses contained in Section 34(1) of

the DRT Act and Section 35 of the Securitisation Act vis a vis Section 38C of the

Bombay Act and Section 26B of the Kerala Act and similar other State legislations

only if there was a specific provision in the two enactments creating first charge in

favour of the banks, financial institutions and other secured creditors but as the

Parliament has not made any such provision in either of the enactments, the first

charge created by the State legislations on the property of the dealer or any other
person, liable to pay sales tax etc., cannot be destroyed by implication or inference,

notwithstanding the fact that banks, etc. fall in the category of secured creditors. In

this connection, reference may be made to the judgments in M.K. Ranganathan and

another v. Government of Madras and others [(1955) 2 SCR 374], State of Gujarat v.

Shyamlal Mohanlal Choksi and others [AIR 1965 SC 1251] and Byram Pestonji

Gariwala v. Union Bank of India and others [(1992) 1 SCC 31]. In M.K.

Ranganathan’s case, a three-Judge Bench of this Court interpreted the expression

“any sale held without leave of the Court of any of the properties” which were added

in Section 232(1) of the Indian Companies Act, 1913 by amending Act No. XXII of

1936 and held that the said expression refers only to sales held through the

intervention of the Court and not to sales effected by the secured creditor outside the

winding up and without the intervention of the Court. While answering in negative

the question whether amendment was intended to bring within the sweep of the

general words “sales effected by the secured creditor outside the winding up”, in

negative, the Court referred to Maxwell on Interpretation of Statutes, the judgment

of Privy Council in P. Murugian v. Jainudeen, C.L. [(1954) 3 W.L.R. 682] and

observed:
“It is a legitimate rule of construction to construe words in an Act
of Parliament with reference to words found in immediate
connection with them. It is also well-recognized rule of
construction that the legislature does not intend to make a
substantial alteration in the law beyond what it explicitly declares
either in express words or by clear implication and that the
general words of the Act are not to be so construed as to alter the
previous policy of the law, unless no sense or meaning can be
applied to those words consistently with the intention of
preserving the existing policy untouched.”

 

40. In Shyamlal Mohanlal Choksi’s case (supra), the Constitution Bench

considered whether Section 94 of the Code of Criminal Procedure, 1898 apply to

accused person under trial and held that it does not. The Court referred to Article 20
(3) of the Constitution which declares that the accused cannot be compelled to

incriminate himself and observed:

“The Indian Legislature was aware of the above fundamental
canons of criminal jurisprudence because in various sections of
the Criminal Procedure Code it gives effect to it. For example, in
Section 175 it is provided that every person summoned by a police
officer in a proceeding under Section 174 shall be bound to attend
and to answer truly all questions other than questions the answers
to which would have a tendency to expose him to a criminal
charge or to a penalty or forfeiture. Section 343 provides that
except as provided in Sections 337 and 338, no influence by means
of any promise or threat or otherwise shall be used to an accused
person to induce him to disclose or withhold any matter within his
knowledge. Again, when the accused is examined under Section
342, the accused does not render himself liable to punishment if
he refuses to answer any questions put to him. Further, now
although the accused is a competent witness, he cannot be called
as a witness except on his own request in writing. It is further
provided in Section 342-A that his failure to give evidence shall
not be made the subject of any comment by any parties or the
court or give rise to any presumption against himself or any
person charged together with him at the same trial.

It seems to us that in view of this background the Legislature, if it
were minded to make Section 94 applicable to an accused person,
would have said so in specific words. It is true that the words of
Section 94 are wide enough to include an accused person but it is
well-recognised that in some cases a limitation may be put on the
construction of the wide terms of a statute (vide Craies on Statute
Law, p. 177). Again it is a rule as to the limitation of the meaning
of general words used in a statute that they are to be, if possible,
construed as not to alter the common law (vide Craies on Statute
Law, p. 187).”

 

41. In Byram Pestonji Gariwala’s case (supra), the Court considered the

question whether the amendment made in the Code of Civil Procedure in 1976 had

the effect of curtailing the authority of counsel to compromise the matter, referred to

some English decisions and observed:

“It is a rule of legal policy that law should be altered deliberately
rather than casually. Legislature does not make radical changes in
law `by a sidewind, but only by measured and considered
provisions’. (Francis Bennion’s Statutory Interpretation,
Butterworths, 1984, para 133). As stated by Lord Devlin in
National Assistance Board v. Wilkinson: (QB p. 661)
“It is a well established principle of construction that a statute is
not to be taken as effecting a fundamental alteration in the
general law unless it uses words that point unmistakably to that
conclusion.”
Statutes relating to remedies and procedure must receive a liberal
construction `especially so as to secure a more effective, a
speedier, a simpler, and a less expensive administration of law’.
See Crawford’s Statutory Construction, para 254. The object of the
amendment was to provide an appropriate remedy to expedite
proceedings in court. That object must be borne in mind by
adopting a purposive construction of the amended provisions. The
legislative intention being the speedy disposal of cases with a view
to relieving the litigants and the courts alike of the burden of
mounting arrears, the word `parties’ must be so construed as to
yield a beneficent result, so as to eliminate the mischief the
legislature had in mind.
There is no reason to assume that the legislature
intended to curtail the implied authority of counsel, engaged in
the thick of proceedings in court, to compromise or agree on
matters relating to the parties, even if such matters exceed the
subject matter of the suit. The relationship of counsel and his
party or the recognised agent and his principal is a matter of
contract; and with the freedom of contract generally, the
legislature does not interfere except when warranted by public
policy, and the legislative intent is expressly made manifest. There
is no such declaration of policy or indication of intent in the
present case. The legislature has not evinced any intention to
change the well recognised and universally acclaimed common
law tradition of an ever alert, independent and active bar with
freedom to manoeuvre with force and drive for quick action in a
battle of wits typical of the adversarial system of oral hearing
which is in sharp contrast to the inquisitorial traditions of the
`civil law’ of France and other European and Latin American
countries where written submissions have the pride of place and
oral arguments are considered relatively insignificant. (See Rene
David, English Law and French Law — Tagore Law Lectures,
1980). `The civil law’ is indeed equally efficacious and even older,
but it is the product of a different tradition, culture and language;
and there is no indication, whatever, that Parliament was
addressing itself to the task of assimilating or incorporating the
rules and practices of that system into our own system of judicial
administration.
So long as the system of judicial administration in
India continues unaltered, and so long as Parliament has not
evinced an intention to change its basic character, there is no
reason to assume that Parliament has, though not expressly, but
impliedly reduced counsel’s role or capacity to represent his client
as effectively as in the past. On a matter of such vital importance,
it is most unlikely that Parliament would have resorted to implied
legislative alteration of counsel’s capacity or status or
effectiveness. In this respect, the words of Lord Atkin in
Sourendra comparing the Indian advocate with the advocate in
England, Scotland and Ireland, are significant: (AIR p. 161)
“There are no local conditions which make it less desirable for the
client to have the full benefit of an advocate’s experience and
judgment. One reason, indeed, for refusing to imply such a power
would be a lack of confidence in the integrity or judgment of the
Indian advocate. No such considerations have been or indeed
could be advanced, and their Lordships mention them but to
dismiss them.”

 

42. We may now advert to the judgments of this Court in Allahabad Bank’s

case (supra), A.P. State Financial Corporation v. Official Liquidator (supra), ICICI

Bank Ltd. v. SIDCO Leathers Ltd. and others [(2006) 10 SCC 452], Transcore v.

Union of India and another [(2008) 1 SCC 125] on which reliance has been placed by

learned counsel for the appellants and also a recent judgment in Union of India v.

SICOM Limited and another [(2009) 2 SCC 121]. In Allahabad Bank’s case, a two-

Judge Bench was called upon to consider the question whether an application can be

filed under the Companies Act, 1956 during the pendency of proceedings under the

DRT Act. The facts of that case show that Allahabad Bank filed an O.A. before the

Delhi Bench of the DRT under Section 19. The same was decreed on 13.1.1998. The

debtor company filed appeal before DRAT, Allahabad. Canara Bank also filed

application under Section 19 before DRT, Delhi. During the pendency of its

application, Canara Bank filed Interlocutory Application before the Recovery Officer

for impleadment in the proceedings arising out of O.A. filed by Allahabad Bank.

That application was dismissed on 28.9.1998. In the auction conducted by the

Recovery Officer, the property of the debtor company was auctioned and the sale was

confirmed. Thereupon, Canara Bank filed applications under Section 22 of the DRT

Act. During the pendency of the applications, Canara Bank filed company

application in Company Petition No. 141 of 1995 filed by Ranbaxy Ltd. against M.S.
Shoes Company under Sections 442 and 537 of the Companies Act for stay of the

proceedings of recovery case No. 9/1998 instituted by the Allahabad Bank. By an

order dated 9.3.1999, the learned Company Judge stayed further sale of the assets of

the Company. Allahabad Bank challenged the order of the learned Company Judge

by filing petition for special leave to appeal. It was argued on behalf of the appellant,

i.e., Allahabad Bank that the DRT Act is a special statute intended for expeditious

adjudication and recovery of debts due to banks and financial institutions and in

view of Section 34(1) of that Act read with sub-section (2) thereof, the company

courts do not have jurisdiction to entertain the application filed by the respondent-

bank. It was argued on behalf of the appellant that in view of the amendment made

in Section 19(19) of the DRT Act, only Section 529A of the Companies Act is

attracted and that too for a limited purpose, i.e., recovery of dues of the workmen.

On behalf of the respondent-bank it was argued that during the pendency of the

winding up petition, the company court can pass appropriate order by entertaining

an application filed under Section 446 read with Section 537 of the Companies Act.

After noticing the rival contentions, this Court framed six points for determination,

first four of which were:
“(1) Whether in respect of proceedings under the RDB Act
at the stage of adjudication for the money due to the banks or
financial institutions and at the stage of execution for recovery of
monies under the RDB Act, the Tribunal and the Recovery
Officers are conferred exclusive jurisdiction in their respective
spheres?
(2) Whether for initiation of various proceedings by the
banks and financial institutions under the RDB Act, leave of the
Company Court is necessary under Section 537 before a winding-
up order is passed against the company or before provisional
liquidator is appointed under Section 446(1) and whether the
Company Court can pass orders of stay of proceedings before the
Tribunal, in exercise of powers under Section 442?
(3) Whether after a winding-up order is passed under
Section 446(1) of the Companies Act or a provisional liquidator is
appointed, whether the Company Court can stay proceedings
under the RDB Act, transfer them to itself and also decide
questions of liability, execution and priority under Section 446(2)
and (3) read with Sections 529, 529-A and 530 etc. of the
Companies Act or whether these questions are all within the
exclusive jurisdiction of the Tribunal?
(4) Whether in case it is decided that the distribution of
monies is to be done only by the Tribunal, the provisions of
Section 73 CPC and sub-sections (1) and (2) of Section 529,
Section 530 of the Companies Court also apply — apart from
Section 529-A — to the proceedings before the Tribunal under the
RDB Act?”

 

The Court referred to various provisions of the DRT Act (in the judgment that Act

was referred to as “RDB Act”) and Companies Act and held:
“21. In our opinion, the jurisdiction of the Tribunal in regard to
adjudication is exclusive. The RDB Act requires the Tribunal
alone to decide applications for recovery of debts due to banks or
financial institutions. Once the Tribunal passes an order that the
debt is due, the Tribunal has to issue a certificate under Section 19
(22) [formerly under Section 19(7)] to the Recovery Officer for
recovery of the debt specified in the certificate. The question
arises as to the meaning of the word “recovery” in Section 17 of
the Act. It appears to us that basically the Tribunal is to
adjudicate the liability of the defendant and then it has to issue a
certificate under Section 19(22). Under Section 18, the jurisdiction
of any other court or authority which would otherwise have had
jurisdiction but for the provisions of the Act, is ousted and the
power to adjudicate upon the liability is exclusively vested in the
Tribunal. (This exclusion does not however apply to the
jurisdiction of the Supreme Court or of a High Court exercising
power under Articles 226 or 227 of the Constitution.) This is the
effect of Sections 17 and 18 of the Act.
22. We hold that the provisions of Sections 17 and 18 of the RDB
Act are exclusive so far as the question of adjudication of the
liability of the defendant to the appellant Bank is concerned.”

 

The Court then referred the recommendations of the Tiwari Committee and

Narasimham Committee regarding priorities of the secured creditors and held:
“Section 19(19) is clearly inconsistent with Section 446 and other
provisions of the Companies Act. Only Section 529-A is attracted
to the proceedings before the Tribunal. Thus, on questions of
adjudication, execution and working out priorities, the special
provisions made in the RDB Act have to be applied.
For the aforesaid reasons, we hold that at the stage of adjudication
under Section 17 and execution of the certificate under Section 25
etc. the provisions of the RDB Act, 1993 confer exclusive
jurisdiction on the Tribunal and the Recovery Officer in respect
of debts payable to banks and financial institutions and there can
be no interference by the Company Court under Section 442 read
with Section 537 or under Section 446 of the Companies Act, 1956.
In respect of the monies realised under the RDB Act, the question
of priorities among the banks and financial institutions and other
creditors can be decided only by the Tribunal under the RDB Act
and in accordance with Section 19(19) read with Section 529-A of
the Companies Act and in no other manner. The provisions of the
RDB Act, 1993 are to the above extent inconsistent with the
provisions of the Companies Act, 1956 and the latter Act has to
yield to the provisions of the former. This position holds good
during the pendency of the winding-up petition against the debtor
Company and also after a winding-up order is passed. No leave of
the Company Court is necessary for initiating or continuing the
proceedings under the RDB Act, 1993. Points 2 and 3 are decided
accordingly in favour of the appellant and against the
respondents.”

On the issue of the workers’ claim under Section 529A of the Companies Act, the

Court observed/held:

“61. The respondent’s contention that Section 19(19) gives
priority to all “secured creditors” to share in the sale proceeds
before the Tribunal/ Recovery Officer cannot, in our opinion, be
accepted. The said words are qualified by the words “in
accordance with the provision of Section 529-A”. Hence, it is
necessary to identify the above limited class of secured creditors
who have priority over all others in accordance with Section 529-
A.

62. Secured creditors fall under two categories. Those who
desire to go before the Company Court and those who like to
stand outside the winding- up.

63. The first category of secured creditors mentioned above
are those who go before the Company Court for dividend by
relinquishing their security in accordance with the insolvency
rules mentioned in Section 529. The insolvency rules are those
contained in Sections 45 to 50 of the Provincial Insolvency Act.
Section 47(2) of that Act states that a secured creditor who wishes
to come before the official liquidator has to prove his debt and he
can prove his debt only if he relinquishes his security for the
benefit of the general body of creditors. In that event, he will rank
with the unsecured creditors and has to take his dividend as
provided in Section 529(2). Till today, Canara Bank has not made
it clear whether it wants to come under this category.
64. The second class of secured creditors referred to above
are those who come under Section 529-A(1)(b) read with proviso
(c) to Section 529(1). These are those who opt to stand outside the
winding-up to realise their security. Inasmuch as Section 19(19)
permits distribution to secured creditors only in accordance with
Section 529-A, the said category is the one consisting of creditors
who stand outside the winding up. These secured
creditors in certain circumstances can come before the Company
Court (here, the Tribunal) and claim priority over all other
creditors for release of amounts out of the other monies lying in
the Company Court (here, the Tribunal). This limited priority is
declared in Section 529-A(1) but it is restricted only to the extent
specified in clause (b) of Section 529-A(1). The said provision
refers to clause (c) of the proviso to Section 529(1) and it is
necessary to understand the scope of the said provision.”

 

43. Similar view was expressed in A.P. State Financial Corporation v. Official

Liquidator (supra). A learned Single Judge of the High Court allowed the

applications filed by the appellant under Section 446(1) of the Companies Act read

with Section 29 and 46 of the SFC Act subject to the condition that the appellant

would undertake to discharge its liability due to workers under Section 529A of the

Companies Act. While dismissing the appeal of the Corporation, this Court held that

non obstante clause contained in Section 529A of the Companies Act being a

subsequent enactment prevails over Section 29 of the SFC Act.
44. The judgment in Allahabad Bank’s case was distinguished by a two-Judge

Bench judgment in ICICI Bank Ltd. v. SIDCO Leathers Ltd. and others (supra). In

that case the appellant and Punjab National Bank had advanced loans to respondent

no.1 for setting up a plant for manufacture of leather boards and for providing

working capital funds respectively. Respondent No. 1 created first charge in favour

of the appellant along with other financial institutions, i.e., IFCI and IDBI by way of

equitable mortgage by deposit of title deeds of its immovable property. A second

charge was created in favour of Punjab National Bank by way of constructive
delivery of title deeds, clearly indicating that the charge in favour of the latter was

subject to and subservient to charges in favour of IFCI, IDBI and ICICI. On an

application filed by respondent No.1, the Allahabad High Court passed winding up

order and appointed official liquidator. The appellant filed suit for recovery of the

amount credited to respondent No.1. The said suit was transferred to the Debts

Recovery Tribunal, Bombay. During the pendency of proceedings before the

Tribunal, official liquidator was granted permission to continue in the proceedings in

the suit. Punjab National Bank filed a civil suit for recovery of money payable to it

by respondent No.1. While the proceedings were pending before the Tribunal and

the Court of Civil Judge, Fatehpur, the assets of the company were sold. The suit

filed by Punjab National Bank was decreed but the proceedings before the Tribunal

remained pending. After decree of the suit, the appellant along with IFCI and IDBI

filed an application before the Company Judge for consideration of their claim on

pro rata basis and also for exclusion of the claim of Punjab National Bank. The

learned Company Judge allowed the first prayer of the appellant but declined the

second one by relying upon the judgment in Allahabad Bank’s case (supra). The

intra-court appeal was dismissed by the Division Bench by relying upon the

provisions of Section 529A. On further appeal, this Court referred to the judgment

in Allahabad Bank’s case (supra) as also Rajasthan State Financial Corporation v.

Official Liquidator [(2005) 8 SCC 190] and held:

“Allahabad Bank therefore, is not an authority for the proposition
that in terms of Section 529-A of the Companies Act the
distinction between two classes of secured creditors does no longer
survive. The High Court, thus, in our considered opinion, was not
correct in that behalf.
In fact in Allahabad Bank it was categorically held that the
adjudication officer would have such powers to distribute the sale
proceeds to the banks and financial institutions, being secured
creditors, in accordance with inter se agreement/arrangement
between them and to the other persons entitled thereto in
accordance with the priority in law.
Section 529-A of the Companies Act no doubt contains a non
obstante clause but in construing the provisions thereof, it is
necessary to determine the purport and object for which the same
was enacted.
In terms of Section 529 of the Companies Act, as it stood prior to
its amendment, the dues of the workmen were not treated pari
passu with the secured creditors as a result whereof innumerable
instances came to the notice of the Court that the workers may not
get anything after discharging the debts of the secured creditors.
It is only with a view to bring the workmen’s dues pari passu with
the secured creditors, that Section 529-A was enacted.

The non obstante nature of a provision although may be of wide
amplitude, the interpretative process thereof must be kept
confined to the legislative policy. Only because the dues of the
workmen and the debts due to the secured creditors are treated
pari passu with each other, the same by itself, in our considered
view, would not lead to the conclusion that the concept of inter se
priorities amongst the secured creditors had thereby been
intended to be given a total go-by.

A non obstante clause must be given effect to, to the extent
Parliament intended and not beyond the same.

Section 529-A of the Companies Act does not ex facie contain a
provision (on the aspect of priority) amongst the secured creditors
and, hence, it would not be proper to read thereinto things, which
Parliament did not comprehend.”

 

45. In Transcore v. Union of India (supra), a two-Judge Bench made detailed

analyses of the provisions of the DRT Act and formulated the following points for

consideration:-

(i) Whether the banks or financial institutions having
elected to seek their remedy in terms of the DRT Act, 1993 can
still invoke the NPA Act, 2002 for realising the secured assets
without withdrawing or abandoning the OA filed before DRT
under the DRT Act.
(ii) Whether recourse to take possession of the secured
assets of the borrower in terms of Section 13(4) of the NPA Act
comprehends the power to take actual possession of the
immovable property.
(iii) Whether ad valorem court fee prescribed under Rule 7
of the DRT (Procedure) Rules, 1993 is payable on an application
under Section 17(1) of the NPA Act in the absence of any rule
framed under the said Act.

 

In dealing with the afore-mentioned questions, the Court noticed the arguments of

learned counsel for the parties and proceeded to observe:-

“Keeping in mind the above circumstances, the NPA Act is
enacted for quick enforcement of the security. The said Act deals
with enforcement of the rights vested in the bank/FI. The NPA
Act proceeds on the basis that security interest vests in the
bank/FI. Sections 5 and 9 of the NPA Act are also important for
preservation of the value of the assets of the banks/FIs. Quick
recovery of debt is important. It is the object of the DRT Act as
well as the NPA Act. But under the NPA Act, authority is given to
the banks/FIs, which is not there in the DRT Act, to assign the
secured interest to securitisation company/asset reconstruction
company. In cases where the borrower has bought an asset with
the finance of the bank/FI, the latter is treated as a lender and on
assignment the securitisation company/asset reconstruction
company steps into the shoes of the lender bank/FI and it can
recover the lent amounts from the borrower.
Therefore, when Section 13(4) talks about taking possession of the
secured assets or management of the business of the borrower, it
is because a right is created by the borrower in favour of the
bank/FI when he takes a loan secured by pledge, hypothecation,
mortgage or charge. For example, when a company takes a loan
and pledges its financial asset, it is the duty of that company to see
that the margin between what the company borrows and the
extent to which the loan is covered by the value of the financial
asset hypothecated is retained. If the borrower company does not
repay, becomes a defaulter and does not keep up the value of the
financial asset which depletes then the borrower fails in its
obligation which results in a mismatch between the asset and the
liability in the books of the bank/FI. Therefore, Sections 5 and 9
talk of acquisition of the secured interest so that the balance sheet
of the bank/FI remains clean. Same applies to immovable
property charged or mortgaged to the bank/FI. These are some of
the factors which the authorised officer of the bank/FI has to keep
in mind when he gives notice under Section 13(2) of the NPA Act.
Hence, equity exists in the bank/FI and not in the borrower.
Therefore, apart from obligation to repay, the borrower
undertakes to keep the margin and the value of the securities
hypothecated so that there is no mismatch between the asset-
liability in the books of the bank/FI. This obligation is different
and distinct from the obligation to repay. It is the former
obligation of the borrower which attracts the provisions of the
NPA Act which seeks to enforce it by measures mentioned in
Section 13(4) of the NPA Act, which measures are not
contemplated by the DRT Act and, therefore, it is wrong to say
that the two Acts provide parallel remedies as held by the
judgment of the High Court in Kalyani Sales Co. As stated, the
remedy under the DRT Act falls short as compared to the NPA
Act which refers to acquisition and assignment of the receivables
to the asset reconstruction company and which authorises
banks/FIs to take possession or to take over management which is
not there in the DRT Act. It is for this reason that the NPA Act is
treated as an additional remedy (Section 37), which is not
inconsistent with the DRT Act.”

 

The Court then adverted to the concept of possession envisaged under Section 13(4)

and held:

“The word possession is a relative concept. It is not an absolute
concept. The dichotomy between symbolic an physical possession
does not find place in the NPA Act. Basically, the NPA Act deals
with the mortgage type of securities under which the secured
creditor, namely, the bank/FI obtains interest in the property
concerned. It is for this reason that the NPA Act ousts the
intervention of the courts/tribunals. Section 13(4-A) refers to the
word “possession” simpliciter. There is no dichotomy in Section
13(4-A) as pleaded on behalf of the borrowers.
The scheme of Section 13(4) read with Section 17(3) of the NPA
Act shows that if the borrower is dispossessed, not in accordance
with the provisions of the NPA Act, then DRT is entitled to put the
clock back by restoring the status quo ante. Therefore, it cannot
be said that if possession is taken before confirmation of sale, the
rights of the borrower to get the dispute adjudicated upon are
defeated by the authorised officer taking possession. The NPA Act
provides for recovery of possession by non-adjudicatory process;
therefore, to say that the rights of the borrower would be defeated
without adjudication would be erroneous.
Rule 8 of the Security Interest (Enforcement) Rules, 2002 (“2002
Rules”) deals with the stage anterior to the issuance of sale
certificate and delivery of possession under Rule 9. Till the time of
issuance of sale certificate, the authorised officer is like a Court
Receiver under Order 40 Rule 1 CPC. The Court Receiver can
take symbolic possession and in appropriate cases where the
Court Receiver finds that a third-party interest is likely to be
created overnight, he can take actual possession even prior to the
decree. The authorised officer under Rule 8 has greater powers
than even a Court Receiver as security interest in the property is
already created in favour of the banks/FIs. That interest needs to
be protected. Therefore, Rule 8 provides that till issuance of the
sale certificate under Rule 9, the authorised officer shall take such
steps as he deems fit to preserve the secured asset. It is well settled
that third-party interests are created overnight and in very many
cases those third parties take up the defence of being a bona fide
purchaser for value without notice. It is these types of disputes
which are sought to be avoided by Rule 8 read with Rule 9 of the
2002 Rules. In the circumstances, the drawing of dichotomy
between symbolic and actual possession does not find place in the
scheme of the NPA Act read with the 2002 Rules.”
The Court then considered three provisos inserted in Section 19(1) of the DRT Act by

amending Act No.30 of 2004 and held that withdrawal of the OA pending before

Tribunal under the DRT Act is not a condition precedent for taking recourse to the

Securitisation Act.

 

46. In Union of India v. SICOM Limited and another (supra), this Court was

called upon to decide whether realization of the duty under the Central Excise Act

will have priority over the secured debts in terms of the SFC Act. The facts of that

case were that respondent no.2 borrowed a sum of Rs.51 lakhs from the first

respondent by an indenture of mortgage executed on 22.12.1986. Respondent No.2

also owed Rs.19 lakhs by way of central excise duty for the period April 1983 to May

1988. By a notification issued under Section 46(1) of the SFC Act, the Government

extended the provisions of Sections 27, 29, 30, 31, 32-A to 32-F, 41 and 41-A of the

SFC Act in favour of the first respondent. Since respondent no.2 defaulted in

repayment of loan given by the first respondent, the latter invoked Section 29 of the

SFC Act and took physical possession of the mortgaged assets. When the department

expressed its intention to attach and seize the properties of respondent no.2, the first

respondent informed that it had first charge over the mortgaged properties. In

August 2000, the first respondent issued a legal notice to the appellant and then filed

a writ petition under Article 226 of the Constitution of India in the Aurangabad

Bench of the Bombay High Court. The High Court considered the provisions of

Rule 213(2) of the Central Excise Rules read with Section 32(g) and Section 151 of the
Maharashtra Land Revenue Code, 1966 and held that as security of the corporation

was prior in point of time, the dues claimed by it will have priority over the dues of

customs. A two-Judge Bench of this Court referred to the non obstante clause

contained in Section 46B of the SFC Act and provisions of priority contained in

Section 529A of the Companies Act as also the provisions of EPF Act and the

Employees State Insurance Act, the judgments in Builders Supply Corporation v.

Union of India (supra), Bank of Bihar v. State of Bihar [(1972) 3 SCC 196], Dena

Bank v. Bhikhabhai Prabhudas Parekh & Co. (supra), Central Bank of India v.

Siriguppa Sugars & Chemicals Ltd. [(2007) 8 SCC 353], State Bank of Bikaner &

Jaipur v. National Iron & Steel Rolling Corporation and others (supra), ICICI Bank

Ltd. v. SIDCO Leathers Ltd. and others (supra) and approved the view taken by the

High Court.

 

47. In none of the afore-mentioned judgments this Court held that by virtue of

the provisions contained in the DRT Act or Securitization Act, first charge has been

created in favour of banks, financial institutions etc. Not only this, the Court was

neither called upon nor it decided competing priorities of statutory first charge

created under Central legislation(s) on the one hand and State legislation(s) on the

other nor it ruled that statutory first charge created under a State legislation is

subservient to the dues of banks, financial institutions etc. even though statutory first

charge has not been created in their favour. The ratio of the judgment in Allahabad

Bank’s case (supra) is that jurisdiction of adjudicatory mechanism established under

the DRT Act is exclusive and no other court or authority created under any other law

can interfere with the proceedings initiated by banks and financial institutions for

recovery of their dues. The other proposition laid down in that case which appear to

have been diluted by a co-ordinate bench in ICICI Bank’s case is that while

distributing the money recovered by a bank or a financial institution, priority given
to the workers’ dues in terms of Section 529A must be respected. Section 11 of the

Central Excise Act, which was considered by the two-Judge Bench in SICOM’s case,

does not contain a provision similar to those in Central legislations like Section 14A

of the Workmen’s Compensation Act, 1923, Section 11 of the EPF Act, Section 74(1)

of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Development

and Regulation) Act, 1957, Section 30 of the Gift Tax Act, 1958 and Section 529A of

the Companies Act, 1956, under which statutory first charge has been created in

respect of the dues of workmen or gift tax etc.

 

48. On the basis of above discussion, we hold that the DRT Act and

Securitisation Act do not create first charge in favour of banks, financial institutions

and other secured creditors and the provisions contained in Section 38C of the

Bombay Act and Section 26B of the Kerala Act are not inconsistent with the

provisions of the DRT Act and Securitisation Act so as to attract non obstante clauses

contained in Section 34(1) of the DRT Act or Section 35 of the Securitisation Act.
49. Another argument of some of the learned counsel for the appellants is that

the prior charge created in favour of the bank would prevail over the subsequent

mortgage created in favour of the State. Dr. Bishwajit Bhattacharyya, learned senior

counsel appearing for the Indian Overseas Bank heavily relied on the judgment of

three-Judge Bench in Dattatreya Shanker Mote and others v. Anand Chintaman

Datar and others (supra) and argued that the view expressed in the subsequent

judgments in State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling

Corporation and others (supra) and R.M. Arunachalam v. Commissioner of Income

Tax, Madras [(1997) 7 SCC 698] requires reconsideration because the same are based

on misrepresentation of the judgment in Dattatreya’s case. He pointed out that

Section 26B of the Kerala Act was inserted with effect from 1.4.1999 and argued that

the same cannot prevail over the prior charge created in favour of the bank in 1973
because the latter could not have had any notice of a charge created in future. Other

learned senior counsel referred to the provisions of Sections 58, 69 and 100 of the

Transfer of Property Act and argued that the charge is not a mortgage although

principles applicable to simple mortgage also apply to a charge and, therefore, the

State cannot claim priority on the basis of non obstante clauses contained in Section

38C of the Bombay Act or Section 26B of the Kerala Act and similar other State

legislations. They further argued that the provisions of the State Acts cannot apply

with retrospective effect so as to affect the right of banks and financial institutions

and other secured creditors to recover their dues from the borrowers.

 

50. Shri Rakesh Dwivedi, learned senior counsel appearing for the State of

Kerala argued that statutory first charge created in favour of the State will have

precedence over a mortgage created in favour of bank etc. and the judgments in State

Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and others

(supra) and R.M. Arunachalam v. Commissioner of Income Tax, Madras (supra) do

not require reconsideration. He pointed out that in Dattatreya’s case the Court was

not dealing with statutory first charge whereas in the other cases the Court had

specifically dealt with such charge created in favour of the State. Shri Dwivedi

pointed out that Section 69 does not apply to a case involving a secured creditor or

Government. On the issue of retrospectivity, the learned senior counsel submitted

that from the date of insertion of Section 26B in the Kerala Act, the dues of sales tax

became first charge over the property of the borrower and the same would super-

impose on the mortgage created in favour of the bank. In support of this argument,

he relied on the judgments of K.S. Paripoornan v. State of Kerala and others [JT

1994 (6) SC 182 = (1994) 5 SCC 593] and Land Acquisition Officer v. B.V. Reddy and

others [(2002) 3 SCC 463].
51. We shall first refer to the judgment in Dattatreya’s case. In that case, the

three-Judge Bench considered the question of priority between a charge created by a

decree and a subsequent simple mortgage. The appellants in that case filed suit for

recovery of Rs.1,34,000/- with interest from respondent Nos.1 to 7. On March 31,

1941, a compromise decree was passed under which a charge was created for the

decretal amount on three pieces of property belonging to respondent Nos. 1 to 7. The

decree was registered on April 7, 1941, but due to inadvertence the charge on

Kakakuva Mansion at Poona was not shown in the index of registration. On June 27,

1949, respondent Nos. 1 to 7 mortgaged Kakakuva Mansion to plaintiff-respondent

No. 14 for a sum of Rs.1,00,000/-. They also created a further charge on September

13, 1949 in favour of plaintiff-respondent no. 14 for Rs.50,000/-. On July 7, 1951, a

charge was created by a decree in favour of respondent No.15 for a sum of

Rs.59,521/11/-. In the meantime, the appellants recovered some amount by execution

of the decree. They sold the property at Shukrawar Peth at Poona and the chawl at

Kalyan. Thereafter, they filed a darkhast in the Court of the 3rd Joint Civil Judge,

Senior Division, Poona for sale of Kakakuva Mansion. Notices were issued under

Order 21 Rule 66 CPC to respondent no. 14 and others. Later on, the executing court

held that presence of plaintiff-respondent no.14 was not necessary. The latter

challenged that order in First Appeal No.668 of 1957 filed before the High Court of

Bombay. He also filed a civil suit in the Court of Joint Civil Judge, Senior Division,

Poona for recovery of Rs.2,18,564/- allegedly due to him under the two mortgages.

During the pendency of that suit, the property was put up for sale on the darkhast of

the appellants, who themselves purchased the property with the leave of the Court.

As a sequel to this, respondent no.14 impleaded the appellants as parties in suit no. 57

of 1958. The appellants contested the suit on the ground that they had a prior charge

and the mortgage of respondent no. 14 was subject to that charge. The trial Judge

decreed the suit in favour of respondent no. 14. In appeal, the High Court modified
the decree of the trial Judge holding that as the mortgage in favour of the respondent

was protected under proviso to Section 100, it is free from the charge created in

favour of the appellants. The High Court also gave priority to respondent no.15 for

its dues, though it had not filed any appeal. The majority judgment of the

Court was delivered by Jaganmohan Reddy, J. who, after noticing various provisions

of the Transfer of Property Act, observed:
“A charge not being a transfer or a transfer of interest in
property nonetheless creates a form of security in respect of
immovable property. So far as mortgage is concerned, it being a
transfer of interest in property the mortgagee has always a
security in the property itself. Whether the mortgage is with
possession or a simple mortgage, the interest in the property
enures to the mortgagee so that any subsequent mortgage or sale
always preserves the rights of the mortgagee whether the
subsequent dealings in the property are with or without notice.
The obvious reason for this is that in a mortgage there is always
an equity of redemption vested in the owner so that the
subsequent mortgagees or transferees will have, if they are not
careful and cautious in examining the title before entering into a
transaction, only the interest which the owner has at the time of
the transaction.
Insofar as competing mortgagees are concerned, Section 48 of the
Act gives priority to the first in point of time in whose favour
transfer of an interest in respect of the same immovable property
is created, if the interest which he has taken and the interest
acquired subsequently by other persons cannot all exist or be
exercised to their full extent together. This section speaks of a
person who purports to create by transfer at different times rights
in or over the same immovable property, and since charge is not a
transfer of an interest in or over the immovable property he gets
no security as against mortgagees of the same property unless he
can show that the subsequent mortgagee or mortgagees had notice
of the existence of his prior charge.”

 

52. In State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling

Corporation and others (supra), another Bench of three Judges considered the effect

of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 by which first charge was

created on the property of the dealer in lieu of the amount of tax, penalty etc. on an

existing mortgage on the property of the dealer. It is borne out from the judgment
that the appellant-bank had given cash credit facility to respondent no.1. For

securing repayment, respondent no.1 mortgaged the factory premises in favour of

the bank. In 1986, the appellant filed suit for recovery of Rs.3,79,672/- with interest.

In that suit, Commercial Taxes Officer got himself impleaded as party by asserting

that State had a prior claim for recovery of Rs.1,19,122/- as dues of sales tax. The

mortgaged property was sold by auction under the orders of the Court. The

Commercial Taxes Officer pleaded that the dues of sales tax should be paid first out

of the sale proceeds and the claim of the bank could be satisfied only out of the

balance amount. The trial Court upheld the claim of the Commercial Taxes Officer.

The revision filed by the bank was dismissed by the High Court. Before this Court it

was argued that the bank’s claim will have precedence over the claim of the sales tax

authorities because mortgage in their favour was prior in point of time. After

noticing Section 11-AAAA of the Rajasthan Sales Tax Act which is pari materia to

Section 38C of the Bombay Act and Section 26B of the Kerala Act as also Section 100

of the Transfer of Property Act and the judgment in Dattatreya’s case, the Court

observed:

“Section 100 of the Transfer of Property Act deals with charges
on an immoveable property which can be created either by an act
of parties or by operation of law. It provides that where
immoveable property of one person is made security for the
payment of money to another, and the transaction does not
amount to a mortgage, a charge is created on the property and all
the provisions in the Transfer of Property Act which apply to a
simple mortgage shall, so far as may be, apply to such charge. A
mortgage on the other hand, is defined under Section 58 of the
Transfer of Property Act as a transfer of an interest in specific
immoveable property for the purpose of securing the payment of
money advanced or to be advanced as set out therein. The
distinction between a mortgage and a charge was considered by
this Court in the case of Dattatreya Shanker Mote v. Anand
Chintaman Datar [(1974) 2 SCC 799]. The Court has observed (at
pages 806-807) that a charge is a wider term as it includes also a
mortgage, in that, every mortgage is a charge, but every charge is
not a mortgage. The Court has then considered the application of
the second part of Section 100 of the Transfer of Property Act
which inter alia deals with a charge not being enforceable against
a bona fide transferee of the property for value without notice of
the charge. It has held that the phrase “transferee of property”
refers to the transferee of entire interest in the property and it
does not cover the transfer of only an interest in the property by
way of a mortgage.”

 

The Court then considered the argument made on behalf of the bank that its dues

will have priority because at the time when the statutory first charge came into

existence, there was already a mortgage in respect of the same property and held:-

“The argument though ingenious, will have to be rejected. Where
a mortgage is created in respect of any property, undoubtedly, an
interest in the property is carved out in favour of the mortgagee.
The mortgagor is entitled to redeem his property on payment of
the mortgage dues. This does not, however, mean that the
property ceases to be the property of the mortgagor. The title to
the property remains with the mortgagor. Therefore, when a
statutory first charge is created on the property of the dealer, the
property subjected to the first charge is the entire property of the
dealer. The interest of the mortgagee is not excluded from the first
charge. The first charge, therefore, which is created under Section
11-AAAA of the Rajasthan Sales Tax Act will operate on the
property as a whole and not only on the equity of redemption as
urged by Mr. Tarkunde.
In the present case, the section creates a first charge on the
property, thus clearly giving priority to the statutory charge over
all other charges on the property including a mortgage. The
submission, therefore, that the statutory first charge created
under Section 11-AAAA of the Rajasthan Sales Tax Act can
operate only over the equity of redemption, cannot be accepted.
The charge operates on the entire property of the dealer including
the interest of the mortgagee therein.
Looked at a little differently, the statute has created a first charge
on the property of the dealer. What is meant by a “first charge”?
Does it have precedence over earlier mortgage? Now, as set out in
Dattatreya Shankar Mote case a charge is a wider term than a
mortgage. It would cover within its ambit a mortgage also.
Therefore, when a first charge is created by operation of law over
any property, that charge will have precedence over an existing
mortgage.”
(Emphasis added)

 

53. In R.M. Arunachalam v. Commissioner of Income Tax, Madras (supra),

the Court reiterated the distinction between a charge and a mortgage in the context
of the provisions contained in Sections 53(1) and 74(1) of the Estate Duty Act, 1953,

referred to the judgments in Dattatreya’s case, State Bank of Bikaner & Jaipur v.

National Iron & Steel Rolling Corporation and others (supra) and observed:

“A charge differs from a mortgage in the sense that in a mortgage
there is transfer of interest in the property mortgaged while in a
charge no interest is created in the property charged so as to
reduce the full ownership to a limited ownership. The creation of
a charge under Section 74(1) of the Estate Duty Act cannot,
therefore, be construed as creation of an interest in property that
is the subject-matter of the charge. The creation of the charge
under Section 74(1) only means that in the matter of recovery of
estate duty from the property which is the subject-matter of the
charge the amount recoverable by way of estate duty would have
priority over the liabilities of the accountable person. In that sense
the claim in respect of estate duty would have precedence over the
claim of the mortgagee because a mortgage is also a charge. The
High Court has, therefore, rightly held that as a result of the
charge created under Section 74(1) of the Estate Duty Act, it could
not be said that title of the assessee to the immovable properties
received by him from Smt Umayal Achi was incomplete and
imperfect in any way. In the context of the facts, the High Court
has found that the assessee had admittedly become the full owner
of the assets even before the payment of estate duty and on
payment of the same he had not acquired a new right, tangible or
intangible, in the assets. It cannot, therefore, be said that the
amount proportionate to estate duty paid by the assessee on the
properties that were transferred should be treated as “cost of
acquisition of the assets” under Sections 48 and 49 read with
Section 55(2) of the IT Act. Since the title of the assessee to the
immovable properties acquired was not incomplete and imperfect
in any way, it cannot also be said that as a result of the payment of
the estate duty by the assessee there was an improvement in the
title of the assessee and the said payment could be regarded as
“cost of improvement” under Section 48 read with Section 55(1)(b)
of the Act.”

 

54. In our opinion, the judgments in State Bank of Bikaner & Jaipur v.

National Iron & Steel Rolling Corporation and others (supra) and R.M.

Arunachalam v. Commissioner of Income Tax, Madras (supra) are based on a

correct reading of the ratio of the Dattatreya’s case and the propositions laid down

therein do not call for reconsideration. At the cost of repetition, we consider it

appropriate to observe that in Dattatreya’s case the Court was not dealing with the

statutory first charge created in favour of the State.
55. The argument of learned counsel for the appellants that the State

legislations creating first charge cannot be given retrospective effect deserves to be

negatived in view of the judgment in State of M.P. and another v. State Bank of

Indore (supra). In that case, it was held that the charge created in favour of the State

under Section 33C of the Madhya Pradesh General Sales Tax Act, 1958 in respect of

the sales tax dues prevail over the charge created in favour of the bank in respect of

the loan taken by 2nd respondent and the amendment made in the State operates in

respect of charges that are in force on the date of introduction of Section 33C.
56. We shall now deal with the individual cases.

57. C.A. No. 95/2005 Central Bank of India v. State of Kerala and others –

The facts of the case have been set out in the earlier part of the judgment.

A recapitulation thereof shows that suit filed by the appellant bank in 1996 for

recovery of its dues was, later on, transferred to the Tribunal and decreed on

1.12.2000. Before that the Tehsildar, Mavelikara had attached the properties of the

borrower on 2.2.2000 and again on 4.9.2000 for recovery of the arrears of sales tax.

The bank challenged the notice issued by Tehsildar for recovery of the arrears of

sales tax but could not persuade the learned Single Judge who held that in view of

Section 26B of the Kerala Act, dues of the State will have priority. The order of the

learned Single Judge was approved by the Division Bench. In our opinion, the view

taken by Kerala High Court is in consonance with what we have held in the earlier

part of the judgment regarding primacy of the State’s first charge over the dues of

banks, financial institutions and secured creditors. Therefore, the impugned orders

do not call for any interference.
58. C.A. No.2811/2006 – The Thane Janata Sahakari Bank Ltd. vs. The
Commissioner of Sales Tax & Others – In this case the bank had taken possession

of the mortgaged assets on 15.2.2005 and sold the same. On 11.7.2005, the officers of

the Commercial Tax Department informed the bank about outstanding dues of sales

tax amounting to Rs. 3,62,82,768/-. The Assistant Commissioner issued notice under

Section 39 of the Bombay Act for recovery of Rs.48,48,614/-. The High Court

negatived the bank’s claim of priority and held that Section 35 of the Securitisation

Act does not have overriding effect over Section 33C of the Bombay Act. The view

taken by the High Court is unexceptional and calls for no interference.

 

59. C.A. No.3549/2006 – Indian Overseas Bank vs. Kerala State and Others –

Respondent no.3 in this appeal, namely, Cheruvathur Brothers,

Chalissery, Palakkad District availed various credit facilities from the appellant-bank

and created mortgage in latter’s favour for securing repayment. On 11.2.1994,

Deputy Tehsildar (RR), Ottapalam (Kerala) requested the bank to furnish details of

the properties mortgaged by respondent no.3 by stating that action was to be initiated

under the Kerala General Sales Tax Act and the Kerala Revenue Recovery Act for

recovery of the arrears of sales tax. The bank claimed that it was a secured creditor

and had a prior charge over the mortgaged properties. Thereafter, recovery

proceedings were initiated by Deputy Tehsildar. The bank filed suit for injunction

bearing OS No.133/1994 with the prayer that State of Kerala and Deputy Tehsildar

(RR), Ottapalam be restrained from attaching and selling the mortgaged property as

described in the schedule attached with the plaint. The bank filed another suit

against respondent no.3 and 4 for recovery of its dues. On the establishment of

Chennai Bench of Tribunal, the second suit was transferred and numbered as T.A.

No.1284/1997. By an order dated 31.12.1998, the Tribunal allowed the application of

the bank and issued recovery certificate for a sum of Rs.23,80,430.95. Thereafter,

Recovery Officer, DRT, Chennai issued notice dated 6.10.1999 to respondent nos.3 to
5 to pay the dues of bank in terms of the decree passed by the Tribunal.

 

60. The suit for injunction filed by the bank was dismissed by Sub Judge,

Ottapalam vide judgment dated 21.12.1999. The trial Court held that the plaintiff

has not produced any evidence to show that it had got a mortgage from defendant

no.3 and on that premise the bank’s plea for injunction was negated. Appeal Suit

No.177/2000 filed by the bank was dismissed by the learned Single Judge of the High

Court vide judgment dated January 19, 2005. Further appeal preferred by the bank

was dismissed by the Division Bench of the High Court on 12.7.2005 by relying upon

the judgment of the Full Bench of the High Court in Kesava Pillai vs. State of Kerala

[2004 (1) KLT 55] by observing that the appeal is not maintainable. In our opinion,

the bank cannot claim priority over the dues of sales tax because statutory first

charge had been created in favour of the State by Section 26B which was inserted in

the Kerala Act with effect from 1.4.1999 and the courts below did not commit any

error by refusing to decree the suit for injunction filed by the bank.

 

61. C.A. No.3973 of 2006 — Bank of Baroda vs. State of Kerala and others –

The appellant-bank extended the loan facilities to respondent no.2 – M/s.

Eastern Cashew Company. Respondent No.3, Mrs. Meena Vasanth gave guarantee

and mortgaged immovable property to secure the dues of the bank. On account of

the borrower’s failure to repay the loan amount, the bank filed O.S. No. 133/86 in the

Court of Sub Judge, Kollam. The same was decreed on 23.3.1993. The judgment of

the trial Court was challenged by the borrower in A.S. No. 229/1994.

Notwithstanding this, the bank filed Execution Petition No. 159/1994 for execution of

the decree. During the execution proceedings, Tehsildar, Kollam issued notice to

respondent no.3 under Section 49(2) of the Kerala Revenue Recovery Act for

payment of arrears of sales tax amounting to Rs.1,19,86,461/-. He also indicated that
41.80 acres of land in revenue survey no. 680/2 will be sold for realization of sales tax

dues. The borrowers challenged the notice by filing writ petitions in the High Court,

which were dismissed on 13.10.2005 and it was held that the State authorities were

free to take action under the Kerala Act. Thereafter, the bank filed Writ Petition

No.7464/2006, questioning the notice issued by the Tehsildar under Kerala Revenue

Recovery Act. The learned Single Judge dismissed the writ petition by observing that

sale was being conducted under the Revenue Recovery Act pursuant to the judgment

of the Court. Writ Appeal No.538/2006 was dismissed by the Division Bench by

placing reliance upon the judgment in South Indian Bank Limited vs. State of Kerala

[2006 (1) KLT 65] in which the following view was expressed:
“Right of the State to have priority in the matter of recovery of
sales tax from the defaulters over the equitable mortgages created
by them in favour of Banks and Financial Institutions is no more
res integra. Dealing with the provisions parallel to Section 26B of
the Kerala General Sales Tax Act by the various Sales Tax Laws
of other States, Supreme Court has already recognized the
statutory first charge in respect of sales tax arrears. Reference
may be made to the decisions of the Apex Court in State Bank of
Bikaner & Jaipur v. National Iron & Steel Rolling Corporation
and Ors. (1995) 96 STC 612), Delhi Auto and General Finance
Pvt. Ltd. v. Tax Recovery Officer and Ors. (1999) 114 STC 273),
Dattatreya Shanker Mote v. Anand Chintaman Datar, Dena Bank
v. Bhikhabhai Prabhudas Prakash Co. and various other
decisions. We may refer to the latest decision of the Apex Court in
State of M.P. v. State Bank of Indore, wherein the court examined
the charge created under Section 33C of the M.P. General Sales
Tax Act, 1958 and held that Section 33C creates a statutory first
charge that prevails over any charge that may be in existence. The
Court held that the charge thereby created in favour of the State
in respect of the sales tax dues of the second respondent prevailed
over the charge created in favour of the Bank. Judicial
pronouncements settled the law once for all stating that State has
got priority in the matter of recovery of debts due and the specific
statutory charge created under the Sales Tax Act notwithstanding
the equitable mortgages created by the defaulters in favour of the
Banks prior to the liability in favour of the State. A Division
Bench of this Court in Sherry Jacob v. Canara Bank, held that
revenue recovery authorities shall have the liberty to proceed
against the property of the company under the Revenue Recovery
Act on the strength of the first charge created over the property
by virtue of Section 26B of the Kerala General Sales Tax Act. The
Court held that the statutory first charge would prevail over any
charge or right in favour of a mortgage or secured creditors and
would get precedence over an existing mortgage right.
We are in this case concerned with the question as to whether
Section 26B of the K.G.S.T. Act would take away the efficacy of a
decree passed by the civil court prior to the introduction of said
section. We are of the view till the decree is executed through
executing court title of the mortgaged property remains with the
mortgagor. Decree passed by the civil court is the formal
expression of an adjudication which conclusively determines the
rights of parties, but unless and until the decree is executed the
Bank would not procure the property and the State’s overriding
rights would have precedence over that of the Bank. When a first
charge created by the operation of law over any property, that
charge will have precedence over an existing mortgage and the
decree obtained by the bank against the mortgagor will not affect
the State since State was not a party to the suit. Decree has only
conclusively determined the rights between the mortgagor and
mortgagee which would not affect the statutory rights of the State.
The expression “rights of parties” used in Section 2(2) means
rights of parties to the suit. State which has got a statutory first
charge under Section 26B of the K.G.S.T. Act would prevail over
the rights created in favour of the Bank by an unexecuted decree.
We therefore hold that the decree obtained by the Bank will not
have any precedence over the first charge created in favour of the
State under Section 26B of the K.G.S.T. Act.”
In our opinion, the High Court has rightly held that the first charge created by

Section 26B of the Kerala Act will have primacy over the bank’s dues.
62. C.A. No.4174/2006 -Ahmad Koya, Kollam v. The District Collector,

Kolam & others – In 1974, respondent no.7, Thomas Stephen and Company, Kollam

took loan from Canara Bank. The company mortgaged two of its properties by

deposit of title deeds as a continuing collateral security. On 24.8.1992, the bank filed

suit for recovery of its dues. On creation of bench of the Tribunal at Cochin, the suit

was transferred to the Tribunal, which passed decree dated 17.2.2000 for a sum of

Rs.41,25,451.64 with interest at the rate of 15% per annum from 24.8.1992. On

24.8.2000, the bank obtained recovery certificate against the company. In the
meanwhile, Tehsildar (Revenue Recovery) issued notice dated 18.7.2000 under

Section 46 of the Kerala Revenue Recovery Act and attached the property of the

company in lieu of the dues of sales tax. He then issued notice dated 13.2.2001 under

Section 49 of the Kerala Revenue Recovery Act for sale of the property. The bank

filed Writ Petition (OP No.8845 of 2001) for quashing the sale notice. By an interim

order, the High Court stayed all proceedings pursuant to the sale notice issued by the

Tehsildar. Thereafter, the bank initiated proceedings for execution of decree dated

17.2.2000. As a sequel to this, the mortgaged properties were put to sale. In the

auction held on 31.1.2003, the petitioner gave bid of Rs.60,60,010/- for the first

property admeasuring 40 cents with building thereon. The second property was not

put to auction apparently because the bid given by the appellant satisfied the bank’s

claim. On 14.2.2003, the petitioner deposited the bid amount. He was in possession of

the auctioned property excluding the area of 8.50 cents which was in the possession of

the 8th respondent, Sherry Jacob as licensee. At that stage, the State Government

filed Writ Petition No.26523 of 2003 for quashing the sale proceedings and also for

issue of a direction to the auction purchaser to hand over the possession of the

property to the revenue officer for conducting fresh auction for realization of the

arrears of sales tax. The appellant also filed Writ Petition No.27302 of 2003 for

restraining the revenue officer from taking action against the auctioned property.

During the pendency of the writ petition, the company was wound up. By an order

dated 10.11.2004, the Division Bench of the High Court disposed of Writ Petition

Nos.26523 of 2003 and 27302 of 2003 along with Writ Appeal Nos.1165 of 2003 and

1230 of 2003 filed by the company and licensee against dismissal of the writ petitions

filed by them challenging the sale conducted by the recovery officer of the Tribunal.

The Division Bench referred to Section 26B of the Kerala Act, judgments of this

Court in State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling

Corporation and others (supra) and State of M.P. v. State Bank of Indore (supra)
and held that the sale conducted by the recovery officer of the Tribunal is illegal

because no notice was given to the revenue officers despite the fact that the property

which was subjected to auction had already been attached. The Division Bench

further held that the State was entitled to enforce the first charge on the property of

the company by conducting fresh auction. The Review Petition filed by the appellant

was dismissed by another Division Bench by recording the following observations:-

“We have already found that the various provisions of the
Recovery of Debts due to Banks and Financial Institutions Act,
1993 would not affect the statutory charge of the State
Government. Therefore the contention raised on the basis of the
Second Schedule to the Income Tax Act, 1961 need not be
examined. Since we have already found that State Government
stands outside the purview of the DRT Act and that the State need
not stand in the queue for claiming priority, the contention of the
counsel for the review Petitioners that the sale effected by State is
vitiated cannot be sustained.
We therefore find no reason to accept the contention raised by
senior counsel. We also find no substance in the arguments raised
by the counsel for the Canara Bank. Contentions raised by the
counsel are only to disturb the substantial right of the State which
has already been recognized by the Division Bench holding that
they have got first charge and the State can adopt its own
procedure for enforcing the statutory charge. Procedural
provision pointed out by the counsel have no relevance while the
State is enforcing the statutory charge. Regarding the contention
raised by senior counsel Sri N.N. Sugunapalan we are of the view,
if any amount is due towards employees provident fund those
matters could be taken up before the State Government. The
power under Section 11(2) would not annul the statutory charge of
the State. Under such circumstance review petitions would stand
dismissed.”

Ms. Indu Malhotra, learned counsel for the appellant argued that decree passed by

the Tribunal on 17.2.2000 was prior to the notice for attachment issued by Tehsildar

under Section 36 of the Kerala Revenue Recovery Act and as the sale notice issued by

him was stayed by the High Court on 15.3.2001, the bank did not commit any

illegality by auctioning the first property of the company. She further argued that

State can recover its dues by auctioning the second property of the company and the
High Court was not justified in nullifying the auction conducted by the recovery

officer of the Tribunal. Learned counsel appearing for the bank argued that since

the State was not a party before the Tribunal, it was not necessary to give notice to

the Tehsildar.

In our view, the High Court did not commit any illegality by nullifying the auction

conducted by the recovery officer of the Tribunal, who, as per admitted factual

matrix of the case, did not give notice to the revenue officer despite the fact that the

property had been attached under Section 36 of the Kerala Revenue Recovery Act

and the bank had challenged the notice issued under Section 49(2) of that Act in Writ

Petition No.8845 of 2001 and succeeded in persuading the High Court to stay that

notice.

63. C.A. No.4909 of 2006 – Central Bank of India v. The Deputy Tehsildar

and others – The petitioner-bank extended financial facilities to the private

respondents, who mortgaged immovable properties for securing repayment. In 1994,

the bank filed suits for recovery of its dues. On establishment of the bench of the

Tribunal at Ernakulam, all the suits were transferred to the Tribunal which passed

decree dated 31.3.2000 in T.A. No.1032/1997, 25.7.2001 in T.A. No.1009/1997 and

9.8.2001 in T.A. No.1015/1997. The bank also issued recovery certificate dated

1.12.2003. However, before the bank could execute the decrees, Tehsildar (Revenue

Recovery), Kollam, initiated proceedings under the Kerala Revenue Recovery Act for

sale of the mortgaged properties which was attached for recovery of the arrears of

sales tax. The petitioner challenged the sale notices issued by Tehsildar in Writ

Petition No.13425 of 2004. The learned Single Judge by relying on the judgment of

this Court in Dena Bank v. Bhikabhai Prabhudas Parekh & Co. (supra) and of the

Division Bench of the High Court in Sherry Jacob v. Canara Bank [2004 (30) KLT

1089] dismissed the writ petition. The Division Bench dismissed the writ appeal.
In our opinion, the High Court rightly held that the Tehsildar was entitled to give

effect to the primacy of statutory first charge created on the property of the dealer

under Section 26B of the Kerala Act.

64. C.A. No.1288 of 2007 – UCO Bank v. State of Kerala & others –

Respondent No.4, M/s. International Trade Links took loan from the appellant-bank

but failed to repay the same. The appellant issued notice under Section 13(2) of the

Securitisation Act and approached Tehsildar (Revenue Recovery) Kanayannur for

rendering assistance to take possession of the mortgaged property. The latter

declined the appellant’s request on the ground that action has already been initiated

under the Kerala Revenue Recovery Act for recovery of sales tax under the Kerala

Act. Thereupon, the appellant filed Writ Petition No.4198 of 2005 for issue of a

direction to the District Collector, Ernakulam and Tehsildar, Kanayannur to take

vacant possession of the mortgaged property. It also prayed that Section 26A and

26B of the Kerala Act be declared unconstitutional and void being inconsistent with

the provisions of the Securitisation Act. By an order dated 7.2.2005, the learned

Single Judge directed the Tehsildar to sell mortgaged property and to permit the

bank to coordinate in the sale. That order was modified on 22.9.2005 and the bank

was allowed to sell the property subject to certain conditions. The bank applied for

modification of order dated 22.9.2005 and prayed that it may be permitted to retain

the money realized from sale of the mortgaged property. The learned Single Judge

did not entertain the appellant’s prayer but directed that if the sale price is lower

than the one mentioned by the government pleader then the sale shall be confirmed

only after getting further order from the court. Liberty was also given to the

borrower/guarantor to pay the arrears. Writ appeal filed by the appellant-bank

against the interim order was disposed of by the Division Bench with the following

observations:-
“Since the revenue authorities have already attached the property
this court will not be justified in directing respondents 2 and 3 to
hand over possession of the property to the Bank. All the same it
is entirely for the State and its officers to decide whether
possession should be handed over to the Bank for taking further
proceedings under the Securitisation Act. We leave it to the State
to take a decision in this matter in accordance with law. Needless
to say, since State has got prior charge it is open to the State to
proceed in accordance with law. Let a decision be taken by the
district Collector within one month from the date of receipt of a
copy of this judgment. The appeal and the writ petition are
disposed of as above. I.A. No.14420 of 2005 would stand
dismissed.”

Since we have already expressed the view that in terms of Section 26B of the Kerala

Act, the State has got prior charge over the property of the dealer and the facts of the

case show that the revenue authorities had already attached the property, there is no

valid ground to interfere with the order passed by the Division Bench.

65. C.A. No.1318 of 2009 [arising out of S.L.P. (C) No.24767 of 2005] – The

South Indian Bank Ltd., Trichur -1 v. State of Kerala & others – In the

year 1984, the appellant-bank granted loan to respondent nos.3 to 5, who mortgaged

their immovable properties as security for repayment. After 8 years, the bank filed

O.S. No.720 of 1992 for recovery of amount of loan with interest. The suit was

decreed on 30.1.1995 for a sum of Rs.3,51,36,973/-. After lapse of three years, the

bank filed O.A. No.1081 of 1998 for recovery of the amount in terms of decree dated

30.1.1995. On 26.7.2000, the Tribunal issued recovery certificate in favour of bank.

In the meanwhile, Tehsildar, Ottapalam issued notice under Section 49(2) of the

Kerala Revenue Recovery Act on 2.6.1999 for sale of the mortgaged properties for

recovery of sales tax dues amounting to Rs.85,45,276/-. The appellant challenged the

proposed sale in Writ Petition (O.P. No.17701 of 1999) and prayed that the State and

its functionaries may be restrained from selling the property. The learned Single

Judge, after noticing the judgment of this Court in State of M.P. v. State Bank of
Indore [(2002) 10 KTR 366 (SC)] held that even if there is first charge in favour of

the bank, the same will not adversely affect the statutory first charge of the State.

Accordingly, he refused to interfere with the proposed sale of the mortgaged

properties but gave liberty to the bank to proceed to execute the decree passed in its

favour in accordance with law. Writ appeal filed by the bank was dismissed by the

Division Bench making observations which have been extracted hereinabove.

66. We are in complete agreement with the Division Bench that statutory first

charge created in favour of the State under Section 26B of the Kerala Act has

primacy over the right of the bank to recover its dues.

67. In the result, the appeals are dismissed. However, it is made clear that this

judgment shall not preclude the banks from realising their dues by taking recourse to

other proceedings, as may be permissible under law. The appellant in Civil Appeal

No.4174 of 2006 shall be free to avail appropriate remedy for refund of the amount

deposited by him in furtherance of the auction conducted by the recovery officer.

………………….J.
[B.N. AGRAWAL]

 

………………….J.
[G.S. SINGHVI]

 

………………….J.
[AFTAB ALAM]
New Delhi,
February 27, 2009.

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