State's Government Dues Cannot Override Secured Creditor's Priority By Mere Attachment: Bombay High Court

The Bombay High Court has ruled that merely attaching a property for recovery of government dues does not give the State priority over a secured creditor when the prescribed proclamation procedure has not been followed.

The court also noted that the State's affidavit was silent on whether its claim had ever been registered with CERSAI.

“By simply attaching the property and taking no steps towards proclamation in the manner as required, for recovery of dues, would not give priority to the said dues over the dues of the secured creditor,” a Division Bench of Justices Manish Pitale and Shreeram V. Shirsat observed.

The case concerned land bearing old Survey No. 46/1/2, later renumbered as Survey No. 43/1/B. The land had been equitably mortgaged to Indian Overseas Bank by deposit of title deeds as security for financial facilities sanctioned in 2007.

After the borrower defaulted, the account was classified as a non-performing asset on December 31, 2010. The bank then began recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Under the SARFAESI process, the bank issued a demand notice under Section 13(2) on September 28, 2012. It subsequently issued a possession notice under Section 13(4) on December 20, 2012.

The dispute arose because the State was separately pursuing recovery of ₹2,68,99,000 owed by the borrower to the District Industries Centre, Raigad, as arrears of land revenue. The authorities claimed to have seized the land and recorded the amount as an encumbrance in the “other rights” column of the 7/12 extract.

On April 7, 2018, the authorities held an auction. As no other person except the Circle Officer and Talathi was present, the Talathi purchased the land on behalf of the Government for Re. 1. A purchase certificate was subsequently issued in the name of the Government of Maharashtra.

A mutation entry dated April 16, 2018 was then made in the 7/12 extract. It recorded the Government of Maharashtra in the occupant's column.

The bank challenged the auction. It contended that it had the prior secured charge over the property and that Section 26E of the SARFAESI Act gave a secured creditor priority over other debts, including government revenues, taxes and cesses.

The bank also disputed whether the particular property had been validly attached. It pointed out that the February 8, 2013 panchanama relied upon by the State did not describe old Survey No. 46/1/2 as having been attached.

The court relied on the Full Bench ruling in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax. The Full Bench held that, for recovery under the Maharashtra Land Revenue Code and the 1967 Rules, simply ordering attachment is not enough.

A proclamation must be issued in the prescribed form and made public before the attached property is sold. The Full Bench referred to methods including beating of drums and other modes specified under the Maharashtra Land Revenue Code and the 1967 Rules.

In the present case, the court found that the State's affidavit was “conspicuously silent” on whether the authorities had ever registered with CERSAI. The affidavit also did not indicate any action beyond attachment, such as beating of drum or affixing the proclamation on the property and the notice board of the concerned Talathi office.

The court therefore held that simply attaching the property without taking the required steps towards proclamation would not give the State's dues priority over those of the secured creditor. It consequently held that the encumbrance or charge shown by the State authorities could not prevail over the bank's charge.

The ruling does not prevent the State authorities from recovering their dues. The court clarified that they could proceed against the borrower in accordance with law, but the bank's secured dues would have priority.

The court also held that the bank's sale of the secured asset to Kaushal Metal and Steel Private Limited and TGK Special Steel Private Limited, subject to compliance with the SARFAESI Act, would confer clear title free from the encumbrances claimed by the State authorities.

Accordingly, the court quashed the April 7, 2018 auction sale. It also directed restoration of control and possession of the property to bank.

The court further directed the authorities to delete Mutation Entry No. 1959 dated April 16, 2018, which recorded the Government of Maharashtra in the occupant's column of the 7/12 extract. The direction was to be complied with within four weeks.

If any surplus amount remains after the bank's dues are satisfied, the bank must notify the State authorities. The State authorities would then be entitled to the residual proceeds from the sale of the secured asset.

The State authorities and the Collector's Office, Raigad-Alibaug, are also free to recover the borrower's dues from other assets or properties. Any such action must be in accordance with law.

For Petitioner: Cyrus Ardheshir, Senior Advocate a/w. Advocates Nandita Bajpai, Babu i/b. Yogesh Pirthani

For Respondents: Kavita Solunke, Addl.G.P. a/w. M.S. Bane, AGP