In a significant order passed on June 28, 2023, in the case of Ronak Industries vs. Assistant Commissioner Central Excise & Customs & Ors.[1] (“Ronak Industries Case”), the Bombay High Court has upheld the priority of dues of secured creditors as laid down under Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). To pass the order, the Bombay High Court has relied on its previous decision in Jalgaon Janta Sahakari Bank Ltd. and Anr. Vs Joint Commissioner of Sales Tax Nodal 9, Mumbai and Anr.[2] and the decision of the Supreme Court in ICICI Bank Ltd. vs. SIDCO Leathers Ltd.[3]and held that the dues of a secured creditor, upon registration of the charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (“CERSAI”), would rank in priority to the dues of the department of the Government.
Facts in the Ronak Industries Case
The Writ Petition was filed by Ronak Industries, inter alia, seeking a direction to remove the lien, charge, encumbrance and/or mutation entry of Assistant Commissioner Central Excise & Customs and Assistant Commissioner, CGST & Central Excise (collectively “Authorities”) on the immovable property (“Secured Asset”). The Secured Asset was purchased by Ronak Industries under an e-auction conducted by Bank of Baroda (secured creditor) under the provisions of the SARFAESI Act read with the Enforcement of Security Interest Rules, 2002 (“Rules”). Ronak Industries contended that the records of Bank of Baroda did not evidence any lien, charge or encumbrance of the Authorities and Bank of Baroda also gave them a letter to that effect. Accordingly, the entire purchase consideration was paid by Ronak Industries to Bank of Baroda and they took physical possession of the Secured Asset and a sale certificate was also issued to them.
Upon approaching the office of the Sub-Registrar for registering the sale certificate, Ronak Industries was informed that the Authorities had created mutation entries in the records of the Sub-Registrar for their outstanding dues under the relevant statutes.
It is pertinent that the charge of Bank of Baroda had been registered by it with CERSAI, while the Authorities had not registered their charges/encumbrances with CERSAI.
Sections 26-B to 26-E of the SARFAESI Act
With a view to streamline and provide clarity in terms of priority of charges on properties of debtors, the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, (“2016 Amending Act”) introduced a fresh chapter (Chapter IV-A) Act and included Sections 26B to 26E to the SARFAESI Act (“Sections”).
- Section 26-B of the SARFAESI Act deals with registration of security interest by creditors, which includes: (i) the registration of attachment orders for recovery of tax or other Government dues by government authorities; and (ii) the registration of attachment orders of a court or authority by any person having a claim against the borrower.
- Section 26-C of the SARFAESI Act states that without prejudice to the provisions contained in any other law for the time being in force, registration of a charge with CERSAI shall be deemed to constitute a public notice from the date and time of filing of particulars. It is also clarified that where a security interest or attachment order upon any property are filed with the CERSAI, the claim of such creditor shall have priority over any subsequent security interest created upon such property. Any transfer by way of sale, lease, assignment or licence of such property or attachment order subsequent to such registration, shall be subject to such claim. The proviso to the sub-section clarifies that nothing contained in the sub-section shall apply to transactions carried on by the borrower in the ordinary course of business.
- Section 26-D of the SARFAESI Act states that notwithstanding anything contained in any other law for the time being in force, no secured creditor shall be entitled to exercise the rights of enforcement of securities under the SARFAESI Act unless the security interest has been registered with the CERSAI.
- Section 26-E of the SARFAESI Act further states that notwithstanding anything contained in any other law for the time being in force (except under the Insolvency and Bankruptcy Code, 2016), after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Summary of law laid down in the Ronak Industries Case and the Jalgaon Janta Case
The Bombay High Court in the Ronak Industries Case and the Jalgaon Janta Case has reviewed the provisions of the SARFAESI Act including the 2016 Amending Act and has, inter alia, laid down the following:
- Registration of security interest is mandatory for any creditor (including a secured creditor) to avail the benefits under the Sections.
- The dues of the secured creditor shall have priority over all other dues, including all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. Hence, the government would have to stand in queue and would be paid only after realisation of debt of the secured creditors, who have registered their charges with CERSAI.
- The provisions of Chapter IV-A and Sections 26B to 26E of the SARFAESI Act would apply prospectively from the date on which the Chapter and Sections were brought into effect.
- A secured creditor, having failed to register its charge with CERSAI, and hence losing the benefit of Section 26-E of the SARFAESI Act, cannot seek priority under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993[4].
- An auction purchaser under the SARFAESI Act would be duty bound to deposit money for discharge of all the encumbrance(s), including statutory charges on account of government dues if the sale is on ‘as is where is’ basis if the purchaser had constructive notice of such encumbrance. It has been clarified that once the debt, charges, encumbrances are registered with CERSAI, it will be presumed that the purchaser has constructive notice of the same.
Conclusion
The law laid down by the Bombay High Court in the Ronak Industries Case and the Jalgaon Janta Case reiterates that while dealing with priority of dues between secured creditors and government dues, the dues of the secured creditors will be paid in priority.
However, by mandating deposit of money for discharge of all encumbrances by the auction purchaser prior to purchasing a property being auctioned under the provisions of the SARFAESI Act, the rulings have the potential to deter auction sale, as a purchaser could be saddled with liabilities over and above the purchase price.
*The authors thank Karan Sangani and Vivek Sharma for their contribution to this article
For further information, please contact:
Indranil Deshmukh, Partner, Cyril Amarchand Mangaldas
indranil.deshmukh@cyrilshroff.com
[1] Writ Petition (L) No.1747 of 2023
[2] [(2022) 5 AIR Bom R 667] passed by the larger bench of Mr. Chief Justice Dipankar Datta, Mr. Hon’ble Justice M. S. Karnik and Mr. Hon’ble Justice N. J. Jamadar. The SLP No. 23729/2022 against the order has been dismissed by the Supreme Court by order dated January 5, 2023
[3] (2006) 10 SCC 452
[4] Section 31B. Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.
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Explanation.—For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.
