State Has First Charge over Secured Assets despite Overriding Provision in Securitisation Act

INTRODUCTION:

(A) In the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter called “the DRT Act”) the overriding provision is Section 34 in Chapter VI of the DRT Act, which provides as under :

34. Act to have over-riding effect.—(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984) ¹[, the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries Development Bank of India Act, 1989 (39 of 1989)].

(B) In the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter called “the Securitisation Act”) the overriding provision is Section 35 in Chapter VI of the Securitisation Act, which provides as under :

"35. The provisions of this Act to override other laws.- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

(C) The provisions of the DRT Act and Securitisation Act are intended to create a new dispensation for expeditious recovery of dues of banks, financial institutions and secured creditors and adjudication of the grievance made by any aggrieved person qua the procedure adopted by the banks, financial institutions and other secured creditors, but the provisions contained therein cannot be read as creating first charge in favour of banks, etc. If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14A of the Workmen's Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift- Tax Act, and Section 529A of the Companies Act, 1956, would have been incorporated in the DRT Act and Securitisation Act.

(D) Recently, a three judge bench of hon’ble Supreme Court in Central Bank of India Vs State of Kerala & Ors [(2009) INSC 435; (2009) 4 SCC 94: Decided on 27.02.2009] has, inter alia, held as follows. To understand the concept better, this judgment merits to be read IN FULL.

“32……..The DRT Act (short for ‘Recovery of Debts Due to Banks and Financial Institutions Act, 1993’) facilitated establishment of two-tier system of Tribunals. The Tribunals established at the first level have been vested with the jurisdiction, powers and authority to summarily adjudicate the claims of banks and financial institutions in the matter of recovery of their dues without being bogged down by the technicalities of the Code of Civil Procedure. The Securitisation Act drastically changed the scenario inasmuch as it enabled banks, financial institutions and other secured creditors to recover their dues without intervention of the Courts or Tribunals. The Securitisation Act also made provision for registration and regulation of securitisation/reconstruction companies, securitisation of financial assets of banks and financial institutions and other related provisions. However, what is most significant to be noted is that there is no provision in either of these enactments by which first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower.

33.  The non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act (short for ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’) give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or Securitisation Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act (short for ‘Bombay Sales Tax Act, 1959’) and Section 26B of the Kerala Act ( short for ‘Kerala General Sales Tax Act, 1963’) also contain non obstante clauses and give statutory recognition to the priority of State's charge over other debts, which were recognized by Indian High Courts even before 1950. In other words, these sections and similar provisions contained in other State legislations not only create first charge on the property of the dealer or any other person liable to pay sales tax, etc. but also give them overriding effect over other laws.

37.  Section 529A of the Companies Act and Section 11(2) of the EPF Act (short for ‘Employees Provident Fund & Misc. Provisions Act, 1952’) both of which are Central legislations also contain non obstante clauses give statutory recognition to the priority of workers dues over other debts. In Allahabad Bank v. Canara Bank and another [(2000) 4 SCC 406], a two-Judge Bench recognized the priority of workers dues under Section 529A of the Companies Act over other debts. In Recovery Officer, Employees Provident Fund v. Kerala Financial Corporation [(2002) 3 ILR Kerala 4], a Division Bench of Kerala High Court considered the primacy of first charge created under Section 11(2) of the EPF Act vis-`-vis Section 46B of the SFC Act (short for ‘the State Financial Corporations Act, 1951’). The facts of that case were that a company by name M/s. Darpan Electronics (P) Ltd. had taken loan from the Kerala Financial Corporation and mortgaged its immovable property for securing repayment. During March 1990 and December 1990, the company defaulted in payment of contributions to the Employees Provident Fund. It also committed default in repayment of loan. The Kerala Financial Corporation sold the moveable assets of the company for a sum of Rs.89,083/-. The recovery officer appointed under the EPF Act made an application for recovery of provident fund contribution. He also attached 37 cents of land which had already been mortgaged by the company to the Financial Corporation and prohibited the bank from transferring the amount of Rs.89,083/- lying in the account of the company. The Corporation challenged this action by filing writ petition under Article 226 of the Constitution, which was allowed by the learned Single Judge. The Division Bench referred to Section 11(2) of the EPF Act and held that the workers dues will have priority over other debts. Speaking for the Bench, B.N. Srikrishna, CJ (as he then was) observed as under:

"Sub-section (2) of section 11 of the EPF and MP Act (short for ‘Employees Provident Fund & Misc. Provisions Act, 1952’) has two facets. First, it declares that the amount due from the employer towards contribution under the EPF and MP Act shall be deemed to be the first charge on the assets of the establishment. Second, it also declares that notwithstanding anything contained in any other law for the time being in force, such debt shall be paid in priority to all other debts. Both these provisions bring out the intention of the Parliament to ensure the social benefit as contained in the legislation. There are other provisions in the Act rendering the amounts of provident fund immune from attachment of civil court's decree, which also indicate such intention of Parliament."

38.  While enacting the DRT Act and Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognized.

If Parliament intended to create first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial pronouncements, dues of banks, financial institutions and other secured creditors should have priority over the State's statutory first charge in the matter of recovery of the dues of sales tax, etc. However, the fact of the matter is that no such provision has been incorporated in either of these enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention of the Court or Tribunal. The reason for this omission appears to be that the new legal regime envisages transfer of secured assets to private companies. The definition of "secured creditor" includes securitization / reconstruction company and any other trustee holding securities on behalf of bank / financial institution. The definition of "securitisation company" and "reconstruction company" in Section 2(v) and (za) shows that these companies may be private companies registered under Companies Act, 1956 and having a certificate of registration from the Reserve Bank under Section 3 of Securitisation Act.

Evidently, Parliament did not intend to give priority to the dues of private creditors over sovereign debt of the State.

39. If the provisions of the DRT Act and Securitisation Act are interpreted keeping in view the background and context in which these legislations were enacted and the purpose sought to be achieved by their enactment, it becomes clear that the two legislations, are intended to create a new dispensation for expeditious recovery of dues of banks, financial institutions and secured creditors and adjudication of the grievance made by any aggrieved person qua the procedure adopted by the banks, financial institutions and other secured creditors, but the provisions contained therein cannot be read as creating first charge in favour of banks, etc. If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14A of the Workmen's Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift- Tax Act, and Section 529A of the Companies Act, 1956 would have been incorporated in the DRT Act and Securitisation Act. Undisputedly, the two enactments do not contain provision similar to Workmen's Compensation Act, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the DRT Act and Securitisation Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other and the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be. The Court could have given effect to the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act vis a vis Section 38C of the Bombay Act and Section 26B of the Kerala Act and similar other state legislations only if there was a specific provision in the two enactments creating first charge in favour of the banks, financial institutions and other secured creditors but as the Parliament has not made any such provision in either of the enactments, the first charge created by the State legislations on the property of the dealer or any other person, liable to pay sales tax etc., cannot be destroyed by implication or inference, notwithstanding the fact that banks, etc. fall in the category of secured creditors……..” (END)

Compiled by:

Narendra Sharma,

Consultant (Corporate Legal)

E-mail: nkdewas@yahoo.co.in