Introduction
In a recent judgment, Indian Overseas Bank vs. Deputy Commissioner of State Tax & Ors.1, the High Court of Bombay (Court), interpreted Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and held that a secured creditor having a prior registration of its security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), has priority, superseding all other debts, including revenues, taxes, cesses, and other rates payable to the Central Government, State Government, or local authority.
Facts
Savair Energy Ltd. (Borrower) availed certain credit facilities from a consortium of banks led by Indian Overseas Bank (Petitioner). The security interests of the secured creditors included a mortgage over certain immovable properties (Secured Assets), which was registered with CERSAI under Section 26-B of the SARFAESI Act. The charge over the Secured Assets was also registered with the Registrar of Companies. Subsequently, the Borrower committed defaults in payment. The Petitioner, after taking measures under the SARFAESI Act, took physical possession of the Secured Assets.
In the meantime, the Maharashtra Value Added Tax (MVAT) Authorities in an attempt to recover amounts due to them, issued an order of attachment, a demand notice, and various letters, asserting a first charge over the Secure Assets based on Section 37 of the Maharashtra Value Added Tax Act, 2002 (MVAT Act).
Judgment
The key question before the Court was "Whether the secured creditor or the MVAT Authorities would have priority over the Secured Assets?".
Relying on the Full Bench judgment in Jalgaon Janta Sahakari Bank Ltd. vs. Joint Commission of Sales Tax Nodal2, the Court analysed Section 26-B to Section 26-E of the SARFAESI Act, and observed that secured creditors and officials enforcing recovery of tax, may register their security interest and attachment orders respectively with CERSAI. Such registration is a constructive public notice of the charge. The ranking of priority of competing charges so registered would be in the sequential order of the registration, and without such a registration, the secured creditor cannot take action under the SARFAESI Act. Under Section 26-E of the SARFAESI Act, once a secured creditor registers its security interest, the debts owed to that creditor shall have priority over all other debts, including taxes payable to the State Government, regardless of any other law in effect. The "registration of security interest" mentioned in Section 26-E refers specifically to the registration with CERSAI as stipulated in Section 26-B.
The Court further held that while Section 37(1) of the MVAT Act would override any contractual provision creating a charge, it would be subordinate to any provision in a Central Act such as the SARFAESI Act, that grants first charge to another entity. Thus, the statutory charge of the MVAT would give way to the priority enjoyed by the Petitioner led consortium.
The Court observed that the 2016 amending SARFAESI Act, clearly reflects the Legislature's intention to prioritize the dues of secured creditors over those of the Central or State Governments, as outlined in the Recovery of Debts and Bankruptcy Act, 1993, and the SARFAESI Act. By introducing Section 26-E in the SARFAESI Act, Parliament explicitly made the "first charge" rights of the government, subordinate to the rights of secured creditors.
Position under IBC
The Supreme Court in the matter of State Tax Officer v. Rainbow Papers Ltd.3 (Rainbow Papers), addressed the question of whether the provisions of the IBC override Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT Act). The Supreme Court ruled that though Section 48 of the GVAT Act is not inconsistent with the IBC, the State will be deemed as a secured creditor under Section 3(30) of the IBC for the purposes of the GVAT Act. Further, if a resolution plan fails to include the statutory dues owed to the State or any legal authority, the NCLT and the NCLAT must reject it.
In our view, Rainbow Papers, does not establish that all government departments or authorities will automatically hold the status of a 'secured creditor' under the IBC. If the relevant governing legislation creates a first charge and is not subject to the IBC, then the statutory authority must be classified as a "secured creditor" under Section 53 of the IBC. Given the holding in Jalgaon Janta Sahakari Bank and the present Indian Overseas Bank judgment, in our view, even if the government dues are classified as secured debt under Rainbow Papers, the charge would still require registration with CERSAI, in order to get priority, in case there is an interplay of the laws.
Footnotes
1. Indian Overseas Bank vs. Deputy Commissioner of State Tax & Ors. (WRIT PETITION NO. 11733 OF 2023).
2. Jalgaon Janta Sahakari Bank Ltd. vs. Joint Commission of Sales Tax Nodal, 2022 (5) MhLJ 691.
3. State Tax Officer v. Rainbow Papers Ltd., 2022 SCC OnLine SC 1162
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