SARFAESI Security Interest Cannot Override Statutory First Charge Under AP Tax Laws: Karnataka High Court

The Karnataka High Court has held that registration of a security interest under the SARFAESI Act does not override a statutory first charge created under State tax laws.

While deciding the dispute, the court also urged the Legislature to clearly specify whether amendments to any law are prospective, retrospective, or retroactive, observing that such clarity would substantially reduce interpretational disputes and conflicting judicial opinions.

Justice Anant Ramanath Hegde delivered the ruling while deciding a dispute between Omkara Assets Reconstruction Pvt. Ltd. and the Telangana Commercial Tax Department over competing claims to the assets of BPL Engineering Ltd.

"The statutory first charge under Andhra Pradesh General Sales Tax Act, 1957, The Central Sales Tax Act,1956 and The Andhra Pradesh Value Added Tax Act, 2005 created dehors the non obstante clause, is not affected by reason of registration of security interest/attachment order under the SARFAESI Act," the court held.

The dispute arose after BPL Engineering mortgaged its property in 1997 and 1998 to secure loans from a lending consortium. The Commercial Tax Department later attached the property in 2007 and 2011 to recover commercial tax dues.

BPL was ordered to be wound up in November 2012. The security interest was registered with CERSAI in 2021. Three years later, the secured debt was assigned to Omkara Assets Reconstruction.

Omkara contended that once the security interest was registered, its claim took priority over the State's tax dues under the amended SARFAESI Act. The Telangana Commercial Tax Department, on the other hand, argued that the statutory first charge created under the Andhra Pradesh General Sales Tax Act, the Andhra Pradesh Value Added Tax Act and the Central Sales Tax Act continued to prevail.

The court did not accept Omkara's contention. It held that Section 26E of the SARFAESI Act gives a secured creditor priority in payment after registration of a security interest, but does not create a statutory first char

It does not create a statutory first charge. As a result, the priority available under Section 26E cannot override a statutory first charge created independently under the State tax laws.

The court also held that the statutory first charge available under the Andhra Pradesh General Sales Tax Act and the Andhra Pradesh Value Added Tax Act extends to the recovery of dues under the Central Sales Tax Act.

The court examined whether a statutory provision declared prospective by the Supreme Court could nevertheless have retroactive application. It held that where the Supreme Court has only ruled that a provision is prospective, without deciding whether it may also operate retroactively, a High Court can examine that question.

"The provision of law, which is declared as “prospective” by the Apex Court, excluding the “retrospective” and “retroactive” or any other kind of application, cannot be examined by the High Court to consider if such law has a retroactive application. However, if a law declared as “prospective”, without dealing with the question on its “retroactive”application, then the Court can examine if such law has “retroactive” application.", the court ruled.

While discussing the interpretation of Chapter IVA of the SARFAESI Act, the court observed that uncertainty over whether amendments apply prospectively, retrospectively, or retroactively has resulted in divergent judicial opinions. It suggested that the Legislature address the issue while amending any law.

"It would always be desirable for the Legislature, while introducing an amendment, to indicate in clear terms whether the law or the amended provision is prospective, retrospective, retroactive and more important, with additional prescription as to how the amended provision is intended to apply to transactions and events that occurred prior to the amendment, to pending proceedings, and to future transactions. Such legislative clarity, though it may not altogether eliminate interpretative disputes, may substantially reduce conflicting judicial opinions," the court observed.

The court clarified that it was not attempting to prescribe legislative policy. It was only drawing attention to an issue that may merit legislative consideration.

The court also suggested reviving the practice of including statutory illustrations in legislation. It observed that illustrations make laws easier to understand and minimise interpretational disputes.

Referring to the illustrations included in the Indian Penal Code, 1860, the Indian Contract Act, 1872, the Transfer of Property Act, 1882 and other legislations, the court observed that such examples simplify the law and reduce interpretational dispute

"However, perhaps unknowingly or unintentionally such a worthy practice is forgotten. It is high time it should be revived. Wherever needed and appropriate, the incorporation of illustrations while enacting or amending a legislation may greatly assist all stakeholders in the justice delivery system. After all the law is meant for the common man and should be drafted in the simplest possible way. It should never be a puzzle.", the court urged.

The court dismissed Omkara Assets Reconstruction's application seeking recall of the tax department's attachment orders. It also recalled its earlier order permitting Omkara to sell the property.

The court upheld the Commercial Tax Department's statutory first charge and permitted it to sell the property to recover the tax dues. The sale proceeds are to be deposited with the Official Liquidator and invested in a fixed deposit with a nationalised bank pending adjudication of the competing claims.

For Applicant: Senior Counsel KG Raghavan, Advocate Vignesh Shetty 

For Respondents: Advocate Manu Prabhakar