Existing charges on property under State Tax Laws remain intact even if banks conduct sales as per SARFAESI/RDB Acts: Kerala High Court

The Kerala High Court recently held that merely because a priority in payment is available to the financial institutions under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 or the Recovery of Debts and Bankruptcy (RDB) Act, 1993, the statutory charge created under various State enactments do not vanish [The Tahsildar (RR) & Ors. v Nizamudeen S & Ors.]..A division bench of Chief Justice S Manikumar and Justice Shaji P Chaly held that if and when any amounts have fallen due as per the provisions of the Kerala General Sales Tax (KGST) Act, 1963 and the Kerala Value Added Tax (KVAT) Act, 2003, and the proceedings start, consequent to which a charge is created on the properties of the assessee, the said charge created would continue to run with the property even if banks or financial institutions conduct sale to recover the amounts due under the mortgage."Therefore we hold that the statutory charge created as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003, prior to any mortgage made, against the dealers would remain intact, even if the property is sold by the Bank, by the rights conferred under Section 26E of the SARFAESI Act, 2002, and Section 31B of the RDB Act 1993 read with the Rules to it, till such time the encumbrances are cleared as per the provisions of the said enactments and the rules thereto," the judgment stated..The Court passed the judgment on a batch of appeals challenging a common judgment of a single-judge that allowed the writ petitions filed by the financial institutions guided by the provisions of the SARFAESI Act. The single-judge had held that a secured creditor under Section 26E of the SARFAESI Act and Section 31B of the RDB Act gets priority over the right claimed by the revenue, both in proceedings against the properties in question, or in recovering the secured debt. The proceedings initiated by the sales tax authorities and the registration authorities had, therefore, been quashed. Common in all the appeals was that amounts were due from various registered dealers, under the State laws, who had availed loans from various financial institutions. Proceedings were initiated as per the provisions of the Kerala General Sales Tax Act, 1963 (KGST Act, 1963) and the Kerala Value Added Tax Act, 2003 (KVAT Act, 2003) to recover the amounts due to the government. Therefore, when steps were taken to register the documents pertaining to the properties sold by the banks under the provisions of the SARFAESI Act, 2002 / the RDB Act, 1993, the Registration department raised objections conveying that, since amounts are due to the State government, as per the provisions of the statutes referred to above, first charge is created over the properties and, therefore, documents cannot be registered as per the provisions of the Registration Act, 1908. Therefore, the issue between the financial institutions and the State government with respect to the rival claims, was as to who has the right to proceed against the property.Also under consideration was whether the first charge created under the statutes referred to above would still continue to run with the properties, in case the bank had sold any property. .The Court made an exhaustive analysis of the the provisions of the SARFAESI Act, RDB Act, KGST Act, KVAT Act, the Security Interest (Enforcement) Rules, 2002 (Rules 2002) and the Transfer of Property Act, 1882, as well as a host of precedents set by the Supreme Court. It noted that Section 26E of the SARFAESI Act creates only a priority in favour of the financial institutions in the matter of payment over all other debts and all revenues, taxes, cesses and other rates payable to the Central government, State government or local authority. But the priority in payment is in no manner in conflict with the first charge created over the properties as per the provisions of the KGST Act and the KVAT Act, the Court held."We are of the considered opinion that the law as it stands today, the State has first charge over the property and the charge runs with the property irrespective of the sale conducted by the financial institutions as per the provisions of the SARFAESI Act, 2002 and the RDB Act, 1993 and the debts are adjusted in priority; in spite of the amendments made to the Acts above. True, the aforesaid acts being central legislations, and going by the rules in vogue, the financial institutions have the right to conduct sale of the secured assets in accordance with law and adjust the amounts due in priority to other debts, but the statutory charge under the state laws would continue to run with the property," the judgment stated..Senior Government Pleaders Mohammed Rafiq and Jaffer Khan and Government Pleader Reshmitha R Chandran appeared the appellant State and its officials.Advocates S Easwaran, P Paulochan Antony, Adarsh Kuma, Aneesh, Mohan Jacob George, Sergi Joseph Thomas, Renee Joshua, Saiju Sathyapalan, L Rajesh Narayanan,Laija Nawabuddin, and Madhu Radhakrishnan appeared for various financial institutions. .[Read Judgment]