INDIAN OVERSEAS BANK, ASSET RECOVERY MANAGEMENT BRANCH v. UNION OF INDIA

MR.SUMESH KUMAR N.C. . THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 09/12/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C) NO. 21806/2008-U PETITIONER'S EXHIBITS: APPENDIX EXT.P1: COPY OF THE LETTER ISSUED BY THE THIRD RESPONDENT CONFIRMING THE EXISTENE OF THE MORTAGE IN FAVOUR OF THE PETITIONER BANK IN RESPECT OF THEIR PROPERTY AT KAVIYOOR IN PATHANAMTHITTA DISTRICT DATED 26/09/2003. EXT.P2: COPY OF THE DEED OF HYPOTHECATION EXECUTED BY THE THIRD RESPONDENT IN FAVOUR OF THE PETITIONER BANK IN RESPECT OF THE PLANT AND MACHINERY INSTALLED/TO BE INSTALLED IN THEIR FACTORY PREMISES AT KAVIYOOR IN PATHANAMTHITTA DISTRICT DATED 24/09/2003. EXT.P3: COPY OF THE NOTICE ISSUED BY THE PETITIONER BANK DEMANDING PAYMENT OF A SUM OF Rs.3,09,31,852/- WITH INTEREST TO THE THIRD RESPONDENT DATED 31/08/2007. EXT.P4: COPY OF THE POSSESSION NOTICE DATED 11/01/2008 PUBLISHED BY THE PETITIONER BANK IN RESPECT OF THE PROPERTIES MORTGAGED AND HYPOTHECATED TO IT BY THE THIRD RESPONDENT AND TAKEN POSSESSION BY PETITIONER. EXT.P5: COPY OF THE AUCTION NOTICE PUBLISHED BY THE AUTHORIZED OFFICER OF THE PETITIONER BANK FOR SALE OF THE ASSETS COVERED BY EXHIBIT P4 NOTICE DATED 08/03/2008. EXT.P6: COPY OF THE NOTIE DATED 31/03/2008 ISSUED BY THE SECOND RESPONDENT TO THE MANAGER OF THE ASSET RECOVERY MANAGEMENT BRANCH OF THE PETITIONER BANK AT CHENNAI. EXT.P7: COPY OF THE LETTER SENT BY THE PETITIONER BANK TO THE SECOND RESPONDENT DATED 21/04/2008. EXT.P8: RESPONDENT TO THE PETITIONER BANK. COPY OF THE NOTICE DATED 23/04/2008 ISSUED BY THE SECOND EXT.P9: WP(C) NO. 39536/2005 DATED 20/12/2006. COPY OF THE JUDGMENT OF THE HIGH COURT OF MADRAS IN RESPONDENT'S EXHIBITS: NIL //TRUE COPY// P.A. TO JUDGE rs. P.N.RAVINDRAN, J. --------------------------- W.P.(C) No. 21806 OF 2008 -------------------------- Dated this the 9th day of December, 2009 J U D G M E N T The petitioner bank had advanced credit facilities to the third respondent company on the security of a large extent of land namely

423.743 cents situated in Re-Sy. Nos.517/7, 517/9, 617/10, 520/6, 515/2, 515/3, 512/2, 512/3 and 515/1 in Block No.14 of Kaviyoor Village, Thiruvalla Taluk, Pathanamthitta District. The third respondent had also hypothecated the plant and machinery as security for the loan. The third respondent defaulted repayment of the loan. The loan was recalled and proceedings were initiated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Initially Ext.P3 notice under Section 13(2) of the said Act was issued on 31.8.2007 calling upon the third respondent to pay the sum of Rs.3,09,31,852/- with interest. The third respondent did not pay the said amount or any part thereof. The bank thereupon took over possession of the security and the movables hypothecated to it on 11.1.2008. Thereafter Ext.P4 notice dated 11.1.2008 was issued to the effect that possession of the security has been taken over. The bank W.P.(C) No. 21806/08 2 thereafter brought the properties to sale by issuing Ext.P5 sale notice dated 8.3.2008. The sale was proposed to be held on 23.4.2008. The upset price fixed was Rs.3,15,00,000/- for lot No.1 and Rs.25,00,000/- for lot No.2. At that stage, the second respondent issued Ext.P6 notice of attachment dated 31.3.2008 requesting the petitioner bank to hold the money realised by sale of the security or the property and any interest or dividend becoming payable thereon, subject to further orders to be passed by him.

On receipt of the said letter, the petitioner bank sent Ext.P7 letter dated 21.4.2008 contending that the bank has first charge over the security and that the bank’s claim will prevail over the claim of the Excise department. The second respondent thereupon passed Ext.P8 order dated 23.4.2008 attaching the movable and immovable properties of the third respondent that had been taken over by the petitioner under the provisions of the the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The sale ordered as per Ext.P5 did not therefore take place. This writ petition was thereupon filed on 18.7.2008 seeking the following reliefs: W.P.(C) No. 21806/08 3

(i) issue a writ of certiorari or any other appropriate writ, direction or order calling for the records leading to Exhibits P6 notice and P8 notice/order issued by the second respondent and quashing the same. (ii) issue a writ of mandamus or any other appropriate writ, direction or order commanding respondents 1 and 2 to refrain from proceeding against he properties of the third respondent as referred to in Exhibit P5 sale notice for recovery of the amounts due to the Central Government.

The petitioner contends that as the secured creditor it has a first charge over the assets of the third respondent company both movable and immovable and that in the absence of any provision in the Central Excise Act, 1944, the claim of respondents 1 and 2 must necessary yield to right of the bank to bring the security to sale and to realise the money due to it. It is contended that the money if any due from the third respondent to respondents 1 and 2 is only in the nature of crown debt which is unsecured and therefore their claim must yield to the first charge which the bank has over the movable and immovable properties of the third respondent.

The learned Assistant Solicitor General of India has filed a statement dated 21.8.2008 contending inter alia that the sum of Rs.1,62,46,992/- being excise duty on excisable goods cleared W.P.(C) No. 21806/08 4 during the period 1.7.1999 to 8.7.2003 is due from the third respondent and that an equal amount by way of penalty under Section 11 AC of the Central Excise Act, 1944 is also due from them. Relying on Section 142 of the Customs Act, 1962 which the second respondent states is made applicable for realising Central Excise dues also, it is contended that the authorised office had attached the properties of the defaulter. The learned Assistant Solicitor General of India also disputes the claim of the petitioner that the first charge which it has over the property will prevail over the claim of the department.

I heard Sri. P.B. Suresh Kumar, the learned counsel appearing for the petitioner and Sri. John Varghese, the learned standing counsel appearing for the Central Board of Excise and Customs. I have also considered the pleadings and the materials on record. A Full Bench of the Madras High Court considered an identical issue in W.P.(C) No.39536 of 2005 and connected cases . In the said writ petition, instituted by the UTI Bank Ltd. to which the Deputy Commissioner of Central Excise, Chennai and the Secretary, Ministry of Finance were parties, the Full Bench held that a crown W.P.(C) No. 21806/08 5 debt is an unsecured one which must yield to the first charge which the UTI Bank has over the property mortgaged by the debtor in its favour. The Full Bench held that in the absence of any specific provision creating a first charge in favour of the Central Excise department, the claim of the Central Excise department cannot have preference over the claim of the UTI Bank. A copy of the said decision of the Full Bench is produced as Ext.P9. The very same issue was considered by the Apex Court in Union of India v.Sicom Ltd. (2009 (2) SCC 121) wherein after an elaborate analysis of the case law on the point, the Apex Court held that a debt which is secured or which by reason of the provisions of a statute becomes a first charge over the property having regard to the plain meaning of Art. 372 of the Constitution of India must be held to prevail over a crown debt which is an unsecured one. After considering Section 11 of the Central Excise Act, 1944, the Apex Court held that the right to recover must start with the sale of excisable goods and that it is only when the dues of the Central Excise department are not satisfied by sale of such excisable goods, proceedings can be initiated to recover the dues as land revenue. The Apex Court also held that the mere W.P.(C) No. 21806/08 6 stipulation that the amounts due can be recovered as if it were a land revenue will not create a first charge over the property.

It is evident from the decision of the Full Bench of the Madras High Court referred to above and also the decision of the Apex Court that the claim of respondents 1 and 2 arising under the Central Excise Act, 1944 must necessarily yield to the first charge which the petitioner bank has over the movable and immovable properties mortgaged and hypothecated by the third respondent company. In such circumstances, it has necessarily to be held that the petitioner bank is entitled to proceed against the security both movable and immovable, under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Rules framed there under to realise the amounts due to them.

The learned counsel appearing for the respondents however submits that if the properties are sold at the upset price presently fixed, the Excise department will be left with no assets to proceed against. He submits with reference to Ext.P3 that the value adopted for the security brought to sale in Ext.P5 sale notice was Rs.428.36 W.P.(C) No. 21806/08 7 lakhs whereas the total upset price shown in Ext.P5 is 340 lakhs. He submits that as more than three crores is due to the Excise Department, the bank should necessarily revise the upset price having regard to the value adopted by it when it issued Ext.P3 notice to the third respondent. Ext.P3 notice was issued on 31.8.2007. More than two years have passed thereafter. The value of immovable property would have appreciated thereafter by passage of time. Ext.P5 discloses that for 423.743 cents of land the upset price fixed is 3,15,00,000/- and for 2.15 acres of land the upset price is Rs.25,00,000/-. Two years have passed after Ext.P5 notice was issued. The petitioner bank should in such circumstances revise the upset price taking note of the current market value of the land. For the reasons stated above, I allow the writ petition and quash Ext.P6 notice and Ext.P8 order issued by the second respondent. It is declared that the petitioner bank will be free to proceed against the property described in Ext.P5 sale notice under the Seciuritisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Rules framed thereunder. The petitioner bank shall issue a fresh sale notice after W.P.(C) No. 21806/08 8 suitably revising the upset price. The petitioner bank shall after the property is sold and the sale price realised, pay over the balance, if any, after adjusting the amounts due to it, to the Central Excise department. P.N.RAVINDRAN, JUDGE