Gujarat High Court
Karur Vysya Bank Limited vs State Of Gujarat on 23 October, 2024
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/17032/2023 ORDER DATED: 23/10/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 17032 of 2023
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KARUR VYSYA BANK LIMITED & ANR.
Versus
STATE OF GUJARAT & ORS.
==========================================================
Appearance:
MR P S DATTA(11324) for the Petitioner(s) No. 1,2
ADVANCE COPY SERVED TO GOVERNMENT PLEADER/PP for the
Respondent(s) No. 1
NOTICE SERVED BY DS for the Respondent(s) No. 1,2,4
NOTICE UNSERVED for the Respondent(s) No. 3
==========================================================
CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
Date : 23/10/2024
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned advocate Mr. S.P.Majmudar
for learned advocate Mr. P.S.Datta for the
petitioners and learned Assistant
Government Pleader Ms.Shrunjal Shah for
the respondent-State.
2. By this petition under Articles 226 and
227 of the Constitution of India, the
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petitioners have prayed for the following
reliefs:
“A. Your Lordships may be pleased to
hold and declare that respondent NO.2
has no authority of law-empowerment to
claim any outstanding dues/charge from
petitioners with regards to land
situated at Survey No. 22/2/P1/p1,
Village Varsana, Tal-Anjar, Dist.
Kachchh;
B. Your Lordships may be pleased to
issue a writ of mandamus or a writ in
the nature of mandamus or any other
appropriate writ, order or directions
directing quashing and setting aside
the orders/communications dated
26.09.2018 as well as 07.09.2019
passed by respondent No.2 (Annexure P)
and further be pleased to quash and
set aside the consequential revenue
Entries No. 1412 as well as 1452
(Annexure P) mutated pursuant to the
aforesaid orders/communication andPage 2 of 31
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further be pleased to direct the
respondent No.2 not to make any claim
against the petitioners with regard to
land situated at Survey No.
22/2/p1/p1, Village Varsana, Ta.Anjar,
District-Kachchh.”
3. Brief facts of the case are as under:
3.1 Petitioner No.1-Bank advanced
financial assistance to one M/s. Mahesh
Industries Private Limited Company in the
year 2011 and created equitable mortgage
over the property of the said company.
3.2 The petitioner-Bank registered the
charge on 09.03.2011 and mutation entry to
that effect was made in the revenue
record. The petitioner No.1-Bank was also
registered with the Central Registry of
Securitisation Asset Reconstruction and
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Security Interest of India [‘CERSAI’ for
short] and a certificate to that effect is
issued on the said date.
4. Learned advocate Mr.S.P.Majmudar has filed
further affidavit of the petitioner No.2-
the auction purchaser placing on record
the search report from the CERSAI obtained
on 19.03.2020 to point out that petitioner
No.1-Bank had registered a charge with
CERSAI on 09.03.2011. It appears that the
respondent-State i.e. respondent Nos. 1
and 2 have directed respondent No.3-
Mamlatdar to register the charge for the
outstanding dues of the respondent-State
by orders dated 26.09.2018 and 07.09.2019
which are challenged in this petition on
the ground that as per the provisions of
section 26E of the Securitisation and
Reconstruction of Financial Assets and
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Enforcement of Securities Interest Act,
2002 [‘SARFESAI’ for short], the
petitioner-Bank would have the prior
charge over the property and the auction
sale conducted by the petitioner No.1-Bank
in favour of the petitioner No.2 could be
free from all encumbrances as far as the
charge of the respondent-State created
pursuant to the aforesaid order is
concerned.
5. Learned advocate Mr. Majmudar placed
reliance on the decision of this Court in
case of Partners Of Siddheshwar Tax Fab &
Ors. Versus State Of Gujarat & Ors
rendered in Special Civil Application No.
2527/2023 on 26.07.2024 to submit that the
petitioner No.1-Bank will have prior
charge over the outstanding dues of the
State and accordingly, the impugned orders
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dated 26.09.2018 and 07.09.2019 are
required to be quashed and set aside and
consequently, Entry Nos. 1412 as well as
1452 mutated in the revenue record are
also required to be deleted.
6. On the other hand, learned AGP Ms.
Shrunjal Shah could not controvert the
facts about prior charge created by the
petitioner No.1 Bank in the year 2011 vis-
a-vis charge created by the respondent-
State in the year 2018 over the property
which is sold in auction by the petitioner
No.1-Bank in favour of petitioner No.2.
7. This Court in the aforesaid decision in
case of Partners Of Siddheshwar Tax Fab &
Ors. Versus State Of Gujarat & Ors(supra)
has held as under:
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“32. In such circumstances, the
question, therefore would arise as to
whether the respondent State would be
entitled to recover any amount from
the Bank, having the priority over the
charge for sale consideration which
was realized on the sale of the
property, as the property once sold,
then charge would be shifted to the
sale consideration realized and
therefore it would be between the
respondent State and the secured
creditor as to who will have first
right to recover such sale
consideration. It may happen that even
though the secured creditor may have
the first charge over the property and
respondent State might have sold the
property then in that circumstances
also the question would arise whether
the secured creditor would be entitled
to recover such sale consideration
from the State Authority by virtue of
first charge over the property.
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33. In such circumstances, as held by
this Court in case of Kalupur
Commercial Cooperative Bank (Supra)
and as per the decision of the Full
Bench of the Bombay High Court, the
secured creditor would have the first
charge in view of the priority of the
charge as prescribed in Section 26E of
the SARFAESI Act and Section 31B of
the RBD Act as the case maybe.
34. In view of the above, now the
question would arise whether the
subsequent decision of the Hon’ble
Apex Court in case of Rainbow Papers
Ltd. (Supra) would be applicable to
the issue as to the priority of the
charge of the secured creditor visa-
vis the provision of Section 48 of the
VAT Act or not as in the said decision
the Hon’ble Apex Court has considered
the provisions of the IBC vis-a-vis
the provision of Section 48 of the VAT
Act. It would be therefore necessary
to revisit the provisions of IBC as
extracted herein above to ascertain
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whether the contention of the
respondent State that in view of the
decision of the Hon’ble Apex Court in
case of Rainbow Papers Ltd. (Supra),
the decision of this Court in case of
Kalupur Commercial Cooperative Bank
(Supra) requires relook or not. The
Hon’ble Apex Court while dealing with
the provisions of IBC has analyzed the
same, more particularly the provision
of Section 3(30) which defines
‘secured creditor’, Section 3(31)
which defines ‘security interest’ and
Section 53 of IBC which deals with the
distribution of assets on realization
of the sale consideration on sale of
the assets of the company in
liquidation. In this context, the
Hon’ble Apex Court has held as under:
“27. Mr. Tushar Mehta, learned
Solicitor General of India
appearing on behalf of the
Appellant with Mr. K.M. Nataraj,
Additional Solicitor General of
India and Ms. Aastha Mehta, learnedPage 9 of 31
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Advocate, referred to Sections
3(30) and 3(31) of the IBC, set out
herein below :-
“Section 3(30) and 3(31) of the
Code read:
“3(30) “secured creditor” means a
creditor in favour of whom security
interest is created;
3(31) “security interest” means
right, title or interest or a
claim to property, created in
favour of, or provided for a
secured creditor by a transaction
which secures payment or
performance of an obligation and
includes mortgage, charge,
hypothecation, assignment and
encumbrance or any other agreement
or arrangement securing payment or
performance of any obligation of
any person:
Provided that security interest
shall not include a performancePage 10 of 31
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guarantee;”
28. The learned Solicitor General of
India submitted that a reading of
Sections 3(30) and 3(31) of the IBC
makes it clear that the finding of the
NCLAT that the State is not a secured
creditor is erroneous and contrary to
the clear definition of secured
creditor under the IBC.
29. As argued by the learned
Solicitor General, the term “Secured
Creditor” as defined under the IBC is
comprehensive and wide enough to
cover all types of security interests
namely, the right, title, interest or
a claim to property, created in
favour of, or provided for a secured
creditor by a transaction, which
secures payment or performance of an
obligation and includes mortgage,
charge, hypothecation, assignment and
encumbrance or any other agreement or
arrangement securing payment or
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performance of any obligation of any
person.
xxxxx
53. In other words, if a company is
unable to pay its debts, which should
include its statutory dues to the
Government and/or other authorities
and there is no plan which
contemplates dissipation of those
debts in a phased manner, uniform
proportional reduction, the company
would necessarily have to be
liquidated and its assets sold and
distributed in the manner stipulated
in Section 53 of the IBC.
54. In our considered view, the
Committee of Creditors, which might
include financial institutions and
other financial creditors, cannot
secure their own dues at the cost of
statutory dues owed to any
Government or Governmental Authority
or for that matter, any other dues.
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55. In our considered view, the
NCLAT clearly erred in its
observation that Section 53 of the
IBC over-rides Section 48 of the
GVAT Act. Section 53 of the IBC
begins with a non-obstante clause
which reads :-
“Not withstanding anything to the
contrary contained in any law
enacted by the Parliament or any
State Legislature for the time being
in force, the proceeds from the sale
of the liquidation assets shall be
distributed in the following order
of priority………..”
56. Section 48 of the GVAT Act is
not contrary to or inconsistent
with Section 53 or any other
provisions of the IBC. Under
Section 53(1)(b) (ii), the debts
owed to a secured creditor, which
would include the State under the
GVAT Act, are to rank equally with
other specified debts including
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debts on account of workman’s dues
for a period of 24 months preceding
the liquidation commencement date.
57. As observed above, the State is
a secured creditor under the GVAT
Act. Section 3(30) of the IBC
defines secured creditor to mean a
creditor in favour of whom security
interest is credited. Such security
interest could be created by
operation of law. The definition of
secured creditor in the IBC does
not exclude any Government or
Governmental Authority.
58. We are constrained to hold that
the Appellate Authority (NCLAT) and
the Adjudicating Authority erred in
law in rejecting the
application/appeal of the
appellant. As observed above, delay
in filing a claim cannot be the
sole ground for rejecting the
claim.”
35. From the above observations of the
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Hon’ble Apex Court, it is clear that
the Apex Court has considered the
provisions of Section 53 of the IBC
vis-a-vis Section 48 of the VAT Act
and has come to the conclusion that
Section 53 of the IBC does not
override the provisions of Section 48
of the VAT Act and outstanding dues of
the State Act as per the provisions of
Section 48 of the VAT Act would be at
pari passu with the dues of the
secured creditor as provided under
Section 53(1)(d)(2) as stated in para
no. 56 extracted herein above. This
decision of the Apex Court was
referred subsequently in case of
Paschimanchal Vidyut Vitran Nigam
Limited Vs. Raman Ispat Private
Limited and Others reported in (2023)
10 SCC 60 while considering the
waterfall mechanism as envisaged in
Section 53 of the IBC Act, wherein it
was observed as under:
“52. PVVNL had relied upon the
decision Rainbow Papers (supra). InPage 15 of 31
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that case, the issue involved was
interpretation of Section 48 of the
Gujarat Value Added Tax Act, 2003
which enacted that any amount
payable towards tax or penalty by
any person would constitute a
‘first charge’ on the property of
such dealer or person. The
corporate debtor had defaulted in
payment of its tax dues and
recovery proceedings had been
initiated. In the meanwhile,
insolvency proceedings had
commenced. During the resolution
process, the State tax authorities
claimed that the dues payable had
to be accrued previously and relied
upon Section 48, in addition to
Section 53 of the IBC. The State
contended that the non-obstante
clause in the state enactment and
the non-obstante clause in the IBC
operated at different fields, and
the State had to be treated as a
‘secured creditor’ by virtue of
Section 48 of the state act. ThisPage 16 of 31
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was rejected by the NCLT and the
NCLAT. However, this court took
note of Sections 30 and 31 of the
IBC and certain other provisions
and held that NCLT had erred in its
observations. It was held that:
“56. Section 48 of the GVAT Act is
not contrary to or inconsistent
with Section 53 or any other
provisions of the IBC. Under
Section 53(1)(b)(ii), the debts
owed to a secured creditor, which
would include the State under the
GVAT Act, are to rank equally with
other specified debts including
debts on account of workman’s dues
for a period of 24 months preceding
the liquidation commencement date.
57. As observed above, the State
is a secured creditor under the
GVAT Act. Section 3(30) of the IBC
defines secured creditor to mean a
creditor in favour of whom
security interest is credited.
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Such security interest could be
created by operation of law. The
definition of secured creditor in
the IBC does not exclude any
Government or Governmental
Authority.
58. We are constrained to hold
that the Appellate Authority
(NCLAT) and the Adjudicating
Authority erred in law in
rejecting the application/appeal
of the appellant. As observed
above, delay in filing a claim
cannot be the sole ground for
rejecting the claim.”
53. Rainbow Papers (supra) did not
notice the ‘waterfall mechanism’
under Section 53 – the provision
had not been adverted to or
extracted in the judgment.
Furthermore, Rainbow Papers
(supra) was in the context of a
resolution process and not during
liquidation. Section 53, as held
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earlier, enacts the waterfall
mechanism providing for the
hierarchy or priority of claims of
various classes of creditors. The
careful design of Section 53
locates amounts payable to secured
creditors and workmen at the
second place, after the costs and
expenses of the liquidator payable
during the liquidation
proceedings. However, the dues
payable to the government are
placed much below those of secured
creditors and even unsecured and
operational creditors. This design
was either not brought to the
notice of the court in Rainbow
Papers (supra) or was missed
altogether. In any event, the
judgment has not taken note of the
provisions of the IBC which treat
the dues payable to secured
creditors at a higher footing than
dues payable to Central or State
Government.
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54. The Gujarat Value Added Tax
Act, 2003 no doubt creates a
charge in respect of amounts due
and payable or arrears. It would
be possible to hold [in the
absence of a specific enumeration
of government dues as in the
present case, in Section 53(1)(e)]
that the State is to be treated as
a ‘secured creditor’. However, the
separate and distinct treatment of
amounts payable to secured
creditor on the one hand, and dues
payable to the government on the
other clearly signifies
Parliament’s intention to treat
the latter differently – and in
the present case, having lower
priority. As noticed earlier, this
intention is also evident from a
reading of the preamble to the Act
itself.
55. According to the principles of
statutory interpretation, when an
enactment uses two different
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expressions, they cannot be
construed as having the same
meaning. It was held in Member,
Board of Revenue v. Anthony Paul
Benthall that:
“When two words of different
import are used in a statute, in
two consecutive provisions, it
would be difficult to maintain
that they are used in the same
sense…”
This idea is reflected in a
subsequent judgment in Brihan
Mumbai Mahanagarpalika & Anr. v.
Willington Sports Club.”
56. The views expressed by the
present judgment finds support in
the decision reported as Sundaresh
Bhatt, Liquidator of ABG Shipyard
v. Central Board of Indirect Taxes
and Customs 38. In that case,
Section 142A of the Customs Act
1962 was in issue – authorities
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had submitted that dues payable to
it were to be treated as ‘first
charge’ on the property of the
assessee concerned. In the
resolution process, it was argued
that the Customs Act, 1962
acquired primacy and had to be
given effect to. This court, after
noticing the overriding effect of
Section 238 of the IBC, held as
follows:
“56. For the sake of clarity
following questions, may be
answered as under:
(a) Whether the provisions of the
IBC would prevail over the Customs
Act, and ifso, to what extent?
56.1. The IBC would prevail over
the Customs Act, to the extent
that once moratorium is imposed in
terms of Sections 14 or 33(5) of
the IBC as the case may be, the
respondent authority only has a
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limited jurisdiction to
assess/determine the quantum of
customs duty and other levies. The
respondent authority does not have
the power to initiate recovery of
dues by means of
sale/confiscation, as provided
under the Customs Act.
(b) Whether the respondent could
claim title over the goods and
issue notice to sell the goods in
terms of the Customs Act when the
liquidation process has been
initiated? Answered in negative.
56. On the basis of the above
discussions, following are our
conclusions:
56.1. Once moratorium is imposed
in terms of Sections 14 or 33(5)
of the IBC as the case may be, the
respondent authority only has a
limited jurisdiction to
assess/determine the quantum ofPage 23 of 31
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customs duty and other levies. The
respondent authority does not have
the power to initiate recovery of
dues by means of
sale/confiscation, as provided
under the Customs Act.
56.2. After such assessment, the
respondent authority has to submit
its claims (concerning customs
dues/ operational debt) in terms
of the procedure laid down, in
strict compliance of the time
periods prescribed under the IBC,
before the adjudicating authority.
56.3. In any case, the
IRP/RP/liquidator can immediately
secure goods from the respondent
authority to be dealt with
appropriately, in terms of the
IBC.”
57. Similarly, in Duncans
Industries Ltd. v. AJ Agrochem39,
Section 16G of the Tea Act, 1953Page 24 of 31
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which required prior consent of
the Central Government (for
initiation of winding up
proceedings) was held to be
overridden by the IBC. In a
similar manner, it is held that
Section 238 of the IBC overrides
the provisions of the Electricity
Act, 2003 despite the latter
containing two specific provisions
which open with nonobstante
clauses (i.e., Section 173 and
174). The position of law with
respect to primacy of the IBC, is
identical with the position
discussed in Sundaresh Bhatt and
Duncan Industries (supra) [refer
also: Innoventive Industries
(supra), CIT v. Monnet Ispat &
Energy Ltd., Ghanashyam Mishra &
Sons (P) Ltd. v. Edelweiss Asset
Reconstruction Co. Ltd., and
Jagmohan Bajaj v. Shivam
Fragrances Private Limited.
58. In view of the above
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discussion, it is held that the
reliance on Rainbow Papers (supra)
is of no avail to the appellant.
In this court’s view, that
judgment has to be confined to the
facts of that case alone.”
36. From the above, it is
clear that the Judgment in case of
Rainbow Papers Ltd. (Supra) is
confined to the facts of the said
case only and therefore, it would
not be required to relook the
decision of the Kalupur Commercial
Cooperative Bank (Supra)
considering the decision of the
Rainbow Papers Ltd. (Supra) of the
Apex Court, as the facts of the
present case are in the realm of
the provisions of the RDB Act and
SARFAESI Act, whereas the decision
of the Apex Court in case of of IBC
Code confined to the facts of the
said case as observed in the
subsequent decision of the Apex
Court.
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37. It is also pointed out by the
learned AGP that the decision of
the Rainbow Papers Ltd. (Supra) was
considered in review, which is
disposed of by the Apex Court as
per para 26 and 27 extracted herein
above. In such circumstances, we
are of the opinion that the
subsequent decision of the Hon’ble
Apex Court, in case of Rainbow
Papers Ltd. (Supra) would not be
applicable with regard to the
applicability of provision of
Section 26E of the SARFAESI Act as
well as provisions of Section 31B
of RDB Act vis-a-vis Section 48 of
the vat Act as analysed and
discussed by this Court in Kalupur
Commercial Cooperative Bank
(Supra).
38. In view of the above
analysis and facts, we would also
like to refer to the subsequent
decision of the Coordinate Bench in
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NEUTRAL CITATION
C/SCA/17032/2023 ORDER DATED: 23/10/2024
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case of Odhavji Mohanbhai Gadhiya
Vs. State of Gujarat (supra),
wherein it is observed by this
Court, that it is a settled legal
position that VAT and Sales Tax
dues has no precedence over the
dues of the Bank for recovery of
which the bank exercises powers
under the SARFAESI Act and dues in
nature of sales tax and VAT payable
by the original owner cannot claim
priority over the dues of the
secured creditor and the principle
that the state debt or crown debt
has no prior claim or the dues
payable to the secured creditors is
no longer res integra, wherein the
Coordinate Bench of this Court has
also referred to the decision of
the Hon’ble Apex Court in case of
Bank of Bihar Vs. State of Bihar
reported in (1972) 3 SCC 196 which
is followed in the decision of the
Dena Bank (Supra) and the law laid
down is that preferential right of
the Crown to recover the debt over
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C/SCA/17032/2023 ORDER DATED: 23/10/2024
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the creditors is limited to the
class of unsecured creditors and
the common law of England or the
principles of equity and good
conscience would not allow the
Crown to have preferential right
for recovery of debt over the
mortgagee or pledge of goods of
secured creditors.
39. In view of the above
settle legal position, the charge
in respect of the property in
question created for sales tax dues
or VAT dues is of no avail and has
no efficacy in law in view of the
provisions of SARFAESI Act and the
RDB Act. The property in question
was sold by respondent no.6-Bank
under the provisions of SARFAESI
Act and the petitioners were
successful purchasers and the sale
certificate is issued and sale deed
is also executed by which the
petitioners have become absolute
owners of the property and
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C/SCA/17032/2023 ORDER DATED: 23/10/2024
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therefore considering the existing
position of law, the charge created
by the respondent State over the
property in question in the year
2018, cannot be sustained and is
accordingly quashed and set aside
and as a consequence the mutation
entries in revenue records also
stands deleted. The petition
accordingly succeeds in the
aforesaid terms. Rule is made
absolute to the aforesaid extent.
No order as to costs.”
8. Considering the above decision and the
facts of the case, it is an undisputed
fact of the case that the petitioner bank
had created a prior charge in the year
2011 as against the charge created by the
State in the year 2018. Therefore, the
petitioner-Bank will have a prior charge
over the property in question which is
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C/SCA/17032/2023 ORDER DATED: 23/10/2024
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sold in auction in favour of petitioner
No.2 and accordingly, the impugned orders
dated 26.09.2018 and 07.09.2019 are hereby
quashed and set aside and consequently,
the Mutation Entry Nos. 1412 and 1452 also
stand deleted. The petition is accordingly
disposed of.
(BHARGAV D. KARIA, J)
(D.N.RAY,J)
JYOTI V. JANI
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