Statutory First Charge & Enforcement of Security Interest by Financial Creditor (Bank) in SARFAESI.

Recently, in two judgments, High Court Mumbai & NCLAT had passed on the burden of satisfaction of “Statutory First Charge holders - MVAT & EPF/Workmen’s dues respectively '' on the auction purchaser under SARFAESI.

i). HC Bombay (18.02.2021) in Medineutrina Pvt. Ltd. Vs District Industries Centre (D.I.C.) and Other  [Writ Petition No. 7971/2019] held that;

• It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever hands the property goes.

• Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same. 

• Thus the purchase of the property on 'as is where is and what is there is ' basis, would mean that the property was being had by the auction purchaser, with all its rights, obligations and liabilities, whatsoever they may be, which would include, all dues, impositions, restrictions as may have been imposed upon the same and consequent to acquiring title to the property, cannot be permitted to quibble out of it, on the alleged plea of not being noticed about any such liability/imposition.

• That apart, it is equally a duty of the auction purchaser, before bidding for the same, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. After acquiring title to the property, the auction purchaser cannot be heard to say that he will have the rights associated with the property and not the liabilities. He takes it lock, stock and barrel, with everything.

• Thus even in the present case, the dues as claimed by the respondent no.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent no.2, before the auction, the petitioner, would be liable to pay the same to the respondent no.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent no.2, it would then be entitled to a no dues certificate from the respondent no. 2.

 

ii). NCLAT (03.03.2021) in Tarun International Ltd. Vs  Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors. [Majority judgement in Company Appeal (AT) (Insolvency) No.1194 of 2019] held that; - 

• There is considerable force in the contention raised by Respondent No.4 that dues of EPF are an encumbrance on the establishment and become first charge thereupon within the purview of Section 11(2) of the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952. 

• we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

Contra view; 

A. Excerpts of Dissenting Judgement Per; V. P. Singh, Member (T) in Tarun International Ltd. Vs  Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors.

• # 35.The first provision to Section 13 of the SARFAESI Act provides that where the secured creditor of a company opts to realise security, he may retain the secured assets' sale proceeds after depositing the workmen's dues to Liquidator. The second proviso to Section 13 imposes a duty on the liquidator to intimate the secured creditor about the workmen's dues. In such cases where workmen's dues cannot be ascertained, the liquidator is obligated to intimate the estimated amount of workers dues to the secured creditor. In such a case, the secured creditor may retain the secured assets' sale proceeds after depositing the amount of such estimated dues with the liquidator. 4th proviso to Section 13 of SARFAESI Act imposes a duty on the secured creditor to give an undertaking to the liquidator to pay the balance of the workmen dues if any. Thus, it is clear that if a company is being wound up and the secured creditor of such a company opts to realise his security, then the secured creditor has authority to retain the secured assets' sale proceeds after depositing the workmen's dues.

B. Blogger’s comments;

The question is, when MVAT dues are deemed to have statutory first charge on the assets of the CD, how come subsequent charge holders, " Bank" took possession of the unit of CD and auctioned the same under SARFAESI. Any realization of assets by a secured creditor is subject to satisfaction of the first/prior charge holder. ( Section 101 of “Transfer of Property Act.”)

 

Secondly, whether " Bank" carried the consent of other prior / pari-passu charge holders & secured creditors, (MVAT), prior to enforcement of security interest, in terms of section 13(9) of the SARFAESI Act. 

 

Thus, in my opinion, the following rulings of the Hon’ble High Court are relevant, when the property is sold by the owner of the property (“Doctrine of Merger of Charge” - Section 101 of “Transfer of Property Act.1882”. Subsequent/subordinate charge gets merged with the property on transfer or enforcement of security interest by creditor.). Satisfaction of first/prior charge holders is the duty of a secured creditor who exercises / enforces his security interest.

• “It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever hands the property goes. . . . . 

• Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same.” 

 

In both the judgements (supra), the position in respect of registration of statutory charge &/or attachment orders with CERSAI, in terms of Section 26B & 26C of The  SARFAESI  Act, 2002 was not examined.

 

Let’s look into the provisions of SARFAESI & other Statutes

 

i). Transfer of Property Act,1882

# 101. No merger in case of subsequent encumbrance. - No merger in case of subsequent encumbrance Any mortgagee of, or person having a charge upon, immovable property, or any transferee from such mortgagee or charge-holder, may purchase or otherwise acquire the rights in the property of the mortgagor or owner, as the case may be, without thereby causing the mortgage or charge to be merged as between himself and any subsequent mortgagee of, or person having a subsequent charge upon, the same property; and no such subsequent mortgagee or charge-holder shall be entitled to foreclose or sell such property without redeeming the prior mortgage or charge, or otherwise than subject thereto.

 

The  SARFAESI  Act, 2002

# Section 13. Enforcement of security interest.-

(9) Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than sixty per cent. in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

 

# Section 26B. Registration by secured creditors and other creditors. -

(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.

 

# Section 26C. Effect of the registration of transactions, etc. -

(1) Without prejudice to the provisions contained in any other law, for the time being in force, any registration of transactions of creation, modification or satisfaction of security interest by a secured creditor or other creditor or filing of attachment orders under this Chapter shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry for creation, modification or satisfaction of such security interest or attachment order, as the case may be.

 

(2) Where security interest or attachment order upon any property in favour of the secured creditor or any other creditor are filed for the purpose of registration under the provisions of Chapter IV and this Chapter, the claim of such secured creditor or other creditor holding attachment order shall have priority over any subsequent security interest created upon such property and any transfer by way of sale, lease or assignment or licence of such property or attachment order subsequent to such registration, shall be subject to such claim:

Provided that nothing contained in this sub-section shall apply to transactions carried on by the borrower in the ordinary course of business.

 

# Section 26E. 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. 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.

 

Insolvency and Bankruptcy Code, 2016.

# Section 52. Secured creditor in liquidation proceedings. -

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.

 

Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# Regulation 37. Realization of security interest by secured creditor

(7) The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993).

 

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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