PRIOTITY OF SECURED
CREDITORS OVER GOVERNMENT DUES
By Vinay
Sonpal LL.M
Advocate
Till
31.08.2016 and with effect from 1.9.2016, the Government dues have lost
priority of its tax dues against the banks or financial institutions secured
creditors (hereinafter referred to as “secured creditors”)since the Recovery of Debts and Bankruptcy Act, 1993
and Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 were amended by inserting sections 31B and section 26E in respective
Acts on 1st September 2016.The section 31B of the Debts and Bankruptcy Act, 1993 came in
force from 1st September 2016 and Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 came in force
from 24th January 2020.
Several High Courts, except Rajasthan High Court in GMG Engineers & Contractor Pvt. Ltd., VS
State of Rajasthan S.B. Civil Writ
Petition No.6872/2017 dt 5th July, 2017, have taken view interpreting the said amendments to have
effect of priority of secured creditors over Government dues in respect of taxes such
as Income Tax Act 1961, Customs Act 1962, Central Excise Act 1944, Finance Tax Act 1994, and other State Tax Laws which
provided for first charge for their respective dues under their laws.
The details of the cases in which the High Courts have held priority of banks or
financial secured creditors are as
follows:
|
1 |
Full Bench decision of the Madras High
Court in Assistant Commissioner Vs. Indian Overseas Bank & Ors. AIR
2017 Madras 67 dt 10th Nov.2016; |
|
2 |
Axis Bank Limited vs State of
Maharashtra Writ Petition No 1796 of
2015 dt 7th March, 2017; 2017 (3) AIR(Bom) R 305 |
|
3 |
Bank of Baroda Vs. Commissioner
of Sales Tax, M.P., Indore & Anr. and by the High Court of Madhya Pradesh
(2018) 55 GSTR210 (MP )dt 31st
Jan,2018; |
|
4 |
Bank Of Baroda Through Its ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 12995 of 2018
dt 16th September, 2019; |
|
5 |
Kalupur Commercial Co-Operative ... vs State Of Gujarat R/SPECIAL CIVIL APPLICATION NO. 17891 of 2018
dt 23rd September, 2019; |
|
6 |
ASREC (India) Limited vs State of Maharashtra Writ Petition No. 1039 of 2017 dt 13th Dec
2019; 2020 (2) BCR 243 |
|
7 |
Cosmos Co-operative Bank Vs. State of
Maharashtra and others, 2019 SCC OnLine Bom 9527 |
|
8 |
Medineutrina
Pvt. Ltd. (Company) Through its Director - Dilipkumar Versus District
Industries Centre (D.I.C.), Udyog Bhavan, Nagpur & Others Writ Petition
No. 7971 of 2019 18th Feb 2021 ; |
In GMG Engineers &
Contractor Pvt. Ltd., VS State of Rajasthan
S.B. Civil Writ Petition No.6872/2017 in judgment dt 5th July, 2017, the
Rajasthan High Court took a view that Section 26E of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 gives priority to the secured creditor but
it cannot be construed to nullify the
statutory first charge.
Similar view is taken by Bombay High Court , Nagpur
Bench, in Medineutrina Pvt. Ltd. (Company) Through its Director - Dilipkumar
Versus District Industries Centre (D.I.C.), Udyog Bhavan, Nagpur & Others
Writ Petition No. 7971 of 2019 18th Feb 2021, concurring with the earlier decisions of the
Courts that secured creditors have priority over Government dues , however it held that :
Ø The dues of the
Bank as a secured creditor, in light of the language of Section 26-E of the
SARFAESI Act will have priority, but
that does not have the effect of wiping out the dues payable under any
Central/State/Local Act, where, for the recovery of such dues, a first charge
has been created When a statutory
charge is created on the property, the same would go with the property and would
follow the property, in whosoever's hands the property goes.
Ø 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. A successful auction purchaser, thus would
hold the property, upon which a statutory charge has been created, subject to
such charge and the property would thus continue to be liable for any statutory
charges created upon it
Ø The priority given
in Section 26-E of the SARFAESI Act, to the Banks, which is a secured creditor,
would only mean that it is first in queue for recovery of its debts by sale of
the property, the other creditors being
relegated to second place and so on in the order of their preferences, as per
law and contract, if any, as the case may be.
Ø The dues under
Section 37(1) of the MVAT Act, 2002 would also be recoverable by sale of the
property, and that puts a liability upon the auction purchaser, who, in case he
wants an encumbrance free title, will have to clear such dues. Thus the purchase
of the property holds it 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.
Ø It 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.
Ø The obligation to make
reasonable enquiries about the encumbrances and liabilities and to include such
liabilities in the notice inviting the bids, is on secured creditor or if that
is not done, to include the tax liabilities in the reserve price, fixed for
sale of the security interest, so that the encumbrances can be taken care of.
Ø The bank is bound to disclose such encumbrances in
advertisement inviting bids. The secured creditor is also bound to make enquires about
any encumbrances attached to the property under sale and disclose to
prospective buyer.
Hence, as on
today, though the secured creditor being bank can appropriate sale proceeds
first in priority, the obligation to discharge tax dues under respective Acts
shall survive and it will for the auction purchaser or secured creditors who
will be responsible for such discharge of tax dues.
However, the
decision in Medineutrina Pvt. Ltd.(supra) is under the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 , the question is whether the ratio will be applicable to the recovery
under the Recovery
of Debts and Bankruptcy Act, 1993, since the wordings of section 31B and
section 26E are different.
One more clarification is needed that the priority is given
to secured creditors under respective Acts , shall always mean any bank or
financial institution or any consortium or group of banks or financial
institutions as secured creditors
and not any private parties which has advanced any funds against security since
the definition of the secured creditors has referred to secured creditors as
banks and such parties on behalf of banks.
History:
Statutory Charge:
The concept of priority of Crown debts over
secured was considered in Dena Bank vs Bhikhabhai Prabhudas Parekh
& Co[ 2000 (5) SCC 694] and Apex Court held that if statute provides
for priority of its dues , it shall prevail. Otherwise, crown debts have priority
only over unsecured creditors and not
over secured creditors
In State Of Bank Bikaner & Jaipur Vs. National Iron & Steel Rolling
Corporation And Others 1995 Scc (2) 19 Apex Court
held that the Section 11- AAAA of the Rajasthan Sales
Tax Act creates a first charge on the property, thus clearly giving priority to
the statutory charge over all other charges on the property including a
mortgage.
When and Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 came in force , several banks contended that banks will have
priority over the states’ first charge because of non obstante clause contained
in the Act.
The controversy was set at rest in favour of States in the
judgment of the Apex Court in Central Bank Of India vs State Of Kerala &
Ors 2009 (4) SCC 94, holding that the DRT Act and Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 does not provide for first charge in respect of secured debts due to
Banks and hence the provisions of State Sales Tax Laws creating first charge
will prevail over the dues recoverable from debtors.
It is settled position in law that
under Income Tax Act 1961, there is no provision in the Act which
provide for priority of Income Dues over debts due to secured creditors.
[
Tax Recovery Officer vs Bank of India and 2 Ors,High Court Of Gujarat At
Ahmadabad Special Civil Application No.
13196 Of 2008 And Special Civil Application No. 888 Of 2009, | Karnataka State
Industrial Investment Development Corporation Ltd., Versus Commissioner of
Income-Tax, Mangalore & Another 2013 AIR(Kar) 104 and, Stock Exchange, Bombay vs. V.S.Kandalgaonkar, in CIVIL APPEAL NO.4354 of 2003 Supreme Court]
Under the Central Excise Act 1944 Section 11E. provides for first charge for any amount of duty, penalty,
interest, or any other sum payable subject to Section 529A of Companies Act, Recovery
of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and
the Securitisation and Reconstruction of Financial Assets and the Enforcement
of Security Interest Act, 2002, (54 of 2002).
Under
the Customs Act 1962 section 142A, and under Service Tax Law
(Finance Act 1994) section 88 ,
provides for first
charge similar to one in under Section 11E of Central
Excise Act 1944.
After the amendments in the Recovery of Debts and
Bankruptcy Act, 1993 and Securitisation and Reconstruction of Financial Assets and
the Enforcement of Security Interest Act, 2002, the provisions of aforesaid tax
statutes providing for first charges is effectively nullified and banks as
secured creditors will have priority over Government dues in respect of taxes.
Hence, to sum up the legal position as emerges
from statutory provisions and judicial pronouncements is that the Secured
Creditors being banks shall have priority over Government tax dues, however ,
in respect of recovery of dues under Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 but tax liability to be discharged by auction purchaser. Under, the Recovery of Debts and
Bankruptcy Act, 1993 there is judgment that decided that statutory charge continues and
till then issue remains open.
INSOLVENCY AND BANKRUPTCY CODE
2016 READ WITH COMPANIES ACT 2013
Under the
IBC, in case of default by debtors when Resolution Professional (RP) is
appointed by Tribunal, claims are invited from creditors, financial and
operational creditors. The statutory dues are classifiable as operational
creditors.The Revenue authorities are obliged to file its claims before the RP.
The bids will be invited from Resolution Applicant and rival Applicants file
their plans. If a plan is approved by Committee of Creditors , the same shall
be put before the Tribunal and on approval of the plan , the creditors will be
paid as per the plan approved. Not infrequently, statutory dues is provided
negligible amounts and revenue has no recourse , except appeal, to accept the
amount provided in the Resolution Plan,As per judgment of Apex Court dt
13.04.2021, in the case of Ghanshyam Mishra all liabilities not provided
in the Resolution Plan shall get extinguished in view of amendment in section
31 to the effect that it shall be binding , inter alia, on the Government.
Hence, no further recovery beyond what is provided in Resolution Plan can be
pursued.
However, when the Resolution Plan fails for
what ever reason or such plan is found to be not viable, the Debtor will be
liquidated and the priority of the Revenue is almost at bottom of all creditors
and above unsecured creditors.
Section
53(1) of the Code lays down
the following order of priority in which the proceeds from the sale of the
liquidation assets shall be distributed:
1. IRP
costs and liquidation costs
2.
Workmen’s due for the period of twenty-four months preceding the liquidation
commencement
date and debts owed to a Secured Creditor
3. Wages
and any unpaid dues owed to employees other than workmen
4.
Financial debts owed to unsecured creditors
5. Any
amount due to the Central Government and the State Government including the
amount to
be received on account of the Consolidated Fund of India and the
Consolidated
Fund of a State, if any, in respect of the whole or any part of the period of
two years
preceding the liquidation commencement date
6. Any
remaining debts and dues
7. Preference
shareholders, if any
8. Equity
shareholders or partners, as the case may be.
***********************************************
