Lender Bank Registered With CERSAI Has 1st Priority Over DCST Against Proceeds Of Enforcement Under SARFAESI Act: Bombay High Court

The Bombay High Court has held that lender bank registration with the Central Registry of Securitisation and Security Interest of India (CERSAI) has first priority over Deputy Commissioner of Sales Tax (GST) (DCST) against proceeds of enforcement under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The bench of Justice B.P. Colabawalla and Justice Somasekhar Sundaresan observed that the Lender Bank had first priority in enforcement against the Walkeshwar Flat with effect from January 24, 2020, having been the first to register with CERSAI, which was done on January 2, 2020. The bench noted that Encore ARC, which conducted the auction on February 28, 2023, acquired the entitlement to priority from the lender bank along with the assignment of the loans to the borrowers with attendant security interests on March 21, 2020.

The petitioner has challenged a persisting attachment by the sales tax authorities over an apartment in Mumbai that has been purchased by the petitioner, Mr. Purushottam Prabhakar Chavan, from an asset reconstruction company in the course of enforcement proceedings.

The attachment has been issued by the state's sales tax authorities, due to which the DCST has been arraigned as Respondent, Encore ARC. The asset reconstruction company is Kallappanna Ichalkaranji Janta Sahakari Bank Ltd. (Lender Bank), the original lender to a set of borrowers. The loans and the attendant security interests have been assigned by the lender bank to Encore ARC.

The DCST started asserting its rights against SMI on October 5, 2015, but the attachment order of that date did not even impose any restraint on the Walkeshwar Flat. By this time, Mrs. PY Shah had passed away. It was on November 8, 2017 that an attachment order first covered the Walkeshwar Flat. Prior to that, in 2016, various steps under Section 13 of the SARFAESI Act had been taken by the Lender Bank in respect of the Walkeshwar Flat, including attachment before judgement in arbitration proceedings. Physical possession of the Walkeshwar Flat was also taken on January 5, 2017.

The issue raised was whether the petitioner, the auction purchaser of the Walkeshwar Flat under the SARFAESI Act, is a valid recipient of free and marketable title to it. The Lender Bank and the DCST have asserted that the Walkeshwar Flat is specifically their first priority.

Section 37 of the MVAT Act, on its own showing, points to the manner of its reconciliation and harmonious construction with Section 26-E of the SARFAESI Act. While Section 37(1) of the MVAT Act would override any provision of contract that creates a charge, it would be subordinate to any provision in a Central Act that gives first charge to some other entity. The Full Bench has ruled in Jalgaon Janta that the first charge provided for in Section 37(1) of the MVAT Act would yield to the priority provided for in Section 26-E of the SARFAESI Act, evidently a Central Act that gives first priority to secured creditors, subject to the security interest being registered with CERSAI.

The court noted that the attachment orders issued prior to January 24, 2020, are of no assistance in giving priority to the DCST in claims over the Walkeshwar Flat. With no registration with CERSAI having been made by the DCST and no proclamation of sale having been issued, the Lender Bank's entitlement to priority has not been undermined. The entitlement flowed to Encore ARC. The consequences of such a priority have led to the petitioner having a free and marketable title free of the encumbrances claimed by the DCST.

The court stated that any attachment sought to have been issued in respect of value-added tax and central sales tax dues owed by SMI, insofar as it relates to the Walkeshwar Flat, is quashed and set aside. The petitioner is entitled to have the Walkeshwar Flat registered in his name, and the DCST can have no objection to such registration.

“The DCST is entitled to any residual proceeds from the sale of the Walkeshwar Flat, after discharge of dues owed to Encore ARC, to the extent of Bharat's proportion of entitlement to the estate of Mrs. PY Shah. Towards this end, Encore ARC is directed to provide to the DCST a statement of accounts in respect of the dues owed by the borrowers to Encore ARC and the appropriation of sale proceeds by Encore ARC pursuant to the auction of the secured assets,” the court said.

Counsel For Petitioner: Karl Tamboly

Counsel For Respondent: K.B. Dighe

Case Title: Purushottam Prabhakar Chavan Versus Deputy Commissioner of Sales Tax (GST)

Case No.: Writ Petition No. 3477 Of 2024

Click Here To Read The Order