Kerala HC holds that secured creditor can claim priority for sale and payment over statutory charges and decides upon the effect of the unnotified amendments to SARFAESI

The Kerala High Court vide its judgment dated May 19, 2020, in the case of Travancore Devaswom Board v. The Deputy Examiner, Local Fund Audit and ors., adjudicated upon whether a secured creditor can claim priority for sale and payment over statutory charge due to the government created under various central enactments and state enactments after the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“Amendment Act, 2016”) and the effect of the unnotified amended provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) (as amended by the Amendment Act, 2016)? Brief facts After the Travancore Devaswom Board (“Board”), was declared the successful bidder in relation to an auction conducted under the SARFAESI Act, its attempt to register the sale deed was refused by the Registering Officer, who had noticed an endorsement in the tax receipt as follows ‘revenue recovery for sales tax D5/3605/16’. On the basis of the said endorsement on the tax receipt, the Sub Registrar ordered that the sale certificate can be presented for registration only after the endorsement in the tax receipt relating to the sale tax revenue recovery is deleted. Issue 1 Whether a secured creditor has priority in charge or takes precedence over the statutory charges due to the government created under various central enactments and state enactments after Amendment Act, 2016? Judgment The court noted, prior to the Amendment Act, 2016, the position of law as regards the secured creditor vis-a-vis the statutory charges was as laid down by the Supreme Court in the decision in Central Bank of India v. State of Kerala and ors., Civil Appeal No. 95 of 2005, wherein it was held that the SARFAESI and the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”) did not create a first charge in favour of the banks and other secured creditors over the statutory charges created under different statutes. However, vide the Amendment Act, 2016, inter-alia, two new provisions were incorporated into the SARFAESI and the RDB Act as Section 26E and Section 31B, respectively. For the purpose of reference, Section 26E of the SARFAESI and Section 31B are extracted hereinbelow "26-E of the SARFAESI Priority to secured creditors.--Notwithstanding anything contained in any other law for the time being in force, 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." "31-B of the RDB Act Priority to secured creditors.--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. introduced amendments to the SARFAESI and RDB Act” The Kerala High Court held that, a mere reading of the aforesaid extracted provisions leave no room for any doubt, that a secured creditor under the SARFAESI has predominance over statutory charges due to the government. The non obstante clause in both provisions makes the intention of Parliament explicit that even as against statutory charges created under other central enactments and state enactments, secured creditors shall have the right for priority in payment and priority to realise the debt by bringing the secured asset for sale. It was further concluded that the provisions of SARFAESI and RDB Act (as amended) containing provisions commencing with non-obstante clauses and giving specific priority to secured creditors even over the taxes due from the Governments, will prevail over the Kerala Value Added Tax Act, 2003 (“KVAT Act”) which states that any tax payable under the KVAT Act shall be the first charge on the property. Issue 2 Whether the amended provisions of SARFAESI as amended by the Amendment Act, 2016 shall have effect (assuming) the same had not been notified? Judgment The Kerala High Court held as follows “We notice that Chapter IV-A of the Amendment Act, 2016 comprising of S. 26E of the SARFAESI Act has not yet been notified. However, absence of notifying the said provision does not belittle its effect as far as priority as provided under the said provision is concerned. By the very making of law, i.e., the Amending Act of 2016, incorporating S. 26E into the SARFAESI Act, a repugnancy has arisen as against the State laws creating first charge for statutory charges. Repugnancy arises the moment a law is made and not merely at its commencement.” It may not be out of place to note that, the Chapter IV-A of the Amendment Act, 2016 had actually been notified with effect from January 24, 2020, vide notification number S.O. 4619(E). dated December 26, 2019, whilst the judgment was delivered only on May 19, 2020. However, it appears that the same was not brought to the attention of the court. This update has been contributed by Arka Majumdar (Partner) and Debanik Bid (Associate). Download Pdf