FIRST CHARGE OVER THE MORTGAGED PROPERTY

FIRST CHARGE OVER THE MORTGAGED PROPERTY

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) introduced a clause as Section 26E giving priority to payment of debts owed to the secured creditor over all other debts and all the revenues, taxes, cess owed to the Central Government or state government. This provision is added to the already existing clause in Section 35 which provides a dominant impact to the SARFAESI Act, notwithstanding anything inconsistent thereupon contained in the other law for the time being in effect or any instrument affecting any such law. The aforementioned provision ostensibly provides priority to the payment of the debts of a secured creditor over each all the debt existing however this bestowment of priority of payments needs to be weighed-in against alternative dues of the person which could have been presented with a primary charge provision underneath various legislations.

One would notice such first charge provisions conjointly within the sales tax laws of other states for instance, in the Rajasthan and Kerala which states that notwithstanding anything contrary containing the other law for the time being in effect, any amount of tax, penalty, interest and any other amount owed by a dealer or any other person shall be the first charge on the property of the dealer or such person.

The fact that Section 26E was introduced in 2016 might lead one to believe that the non-obstante clause underneath this section providing for a priority in payment to the secured creditor over all other dues below any statute, would have precedence in terms of enforceability, overall different provisions that existed before 2016, thereby giving an absolute right to the secured creditors to enforce its security. However, one must analyse whether or not it shall be lawful for a secured creditor to enforce its interest by selling or disposing-off the secured asset that happens to be mortgaged with a first charge created vide a statute existing before 2016, and conjointly regarding the legitimacy of the title over the asset thus acquired by the transferee from the secured creditor. Implications of a non-obstante clause are laid down by the courts in numerous cases whereby it’s been held that before imposing a non-obstante clause, it’s essential to search out out the extent to which the law-makers had meant to convey one provision an overriding impact over another prevailing provision and this should be done, keeping in sight the legislative policy underlying the prevailing enactments.

This is as a result of the principle that a consequent law doesn’t essentially repeal an earlier law however would possibly repeal a provision to the extent that it’s conflicting with the later provision. A non-obstante provision comes into effect solely just in case there’s a conflict between the prevailing provisions relating to a similar subject matter.

The Gujarat HC in the case of Kalupur Commercial Co-Operative Bank Ltd. v. State of Gujarat 2019 SCC OnLine Guj 1892 laid down that a bank as a secured creditor has the first right on the mortgaged property before the state government’s right to recover taxes from it. The court also ruled while dealing with a petition filed by Kalupur Commercial Cooperative Bank Ltd, which was facing hurdles in recovering dues from one MM traders because the state government was insisting on attaching its properties, which were in possession of the bank and had been put on auction. The state government wanted attachment of the properties for recovery of VAT.

It is known that the multi-state bank gave a loan of 60 crores to this MM Traders, who promised its 3 properties as collateral for that loan. In a few years only, the company failed to repay a sum of 7.87 crores. Hence, in 2015, the bank began to recover its dues under SARFAESI Act. Post issuing notices to the company, the bank approached the metropolitan magistrate, who appointed a court commissioner to take the possession of the three properties which were kept as collateral. The commissioner took possession of the properties and handed them over to the bank in 2018. 

In March 2017, the government approached the bank claiming first rights over the three properties under Section 48 of the VAT Act. The government also claimed that the bank doesn’t have any kind of first rights on the properties under the SARFAESI Act. Justice A C Rao and J B Pardiwala observed that the bank had moved first to recover its dues from the company. The bench stated that Section 48 of the VAT Act would come into the picture only when the government had finalised the liability after assessment of the dues. But here, the authority passed the order late.

The HC allowed the petition of the bank, granting the first right to recover dues from the company. The court laid down that the bank has the first charge over the properties mortgaged from the company under Section 26E of the SARFAESI Act.

Therefore, to be underneath the impression that Section 26E being a non-obstante clause can perpetually have an overriding impact over all the prevailing provisions addressing the priority of payments might blindside the secured creditor, because the prevailing effect of a non-obstante clause shall be determined on a case to case basis in light of the ratio set down by the courts.

It will perpetually be helpful for a secured creditor to take into account provisions of the first charge provided in other laws and to be cautious regarding any statutory encumbrances or the crystallisation of any charge on the asset provided thereto as security, particularly once the secured creditor is devouring of enforcing its security interest by counting on the priority bestowed to him/ her under Section 26E of the SARFAESI Act. 

This article is Authored by Shreya Arora.

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