[ Central Bank of India v. State of Kerala & Ors.,
(2009) 4 Supreme Court cases 94]
The question which arose for determination before the Apex
Court was whether S. 38-C of the Bombay Sales Tax Act, 1959 (the Bombay Act)
and S. 26-B of the Kerala General Sales Tax Act, 1963 (the Kerala Act) and
similar provisions contained in other State legislations by which a first
charge was created on the property of the dealer or such other person, who was
liable to pay sales tax, etc. were inconsistent with the provisions contained
in the Recovery of Debts due to Banks and Financial Institutions Act, 1993
(the DRT Act) for recovery of ‘debt’ and the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (the
Securitisation Act) for enforcement of ‘security interest’ and whether by
virtue of non obstante clauses contained in S. 34(1) of the DRT Act and
S. 35 of the Securitisation Act, the two Central legislations had primacy over
State legislations.
The borrower, who had mortgaged his properties to the
creditor bank failed to repay the dues. The appellant bank therefore filed a
suit which was ultimately decreed by the Debts Recovery Tribunal.
Consequently, a recovery certificate was issued in favour of the bank and the
recovery officer issued notice for sale of the properties of the borrower. At
that stage the Tahsildar issued a notice to the borrower for recovery of a
certain sum as arrears of land revenue. The notice stated that the properties
had been attached and steps were being taken to sell the same by auction. The
Tahsildar claimed that by virtue of S. 26-B of the Kerala Act, the State Govt.
had got first charge over the attached properties. The bank filed a writ
petition contending that being a Central legislation, the DRT Act would
prevail over the Kerala Act. The writ petition was dismissed. The bank
appealed therefore to the Supreme Court.
Similarly a company borrowed a certain sum from the
appellant bank by creating an equitable mortgage of its properties in favour
of the bank. Due to the company’s failure to repay the amount, its account was
classified as a non-performing asset and the bank initiated proceedings under
the Securitisation Act by issuing notice u/s.13(2). The bank took possession
of the properties of the company and sold the same. The ACST informed the bank
that sales tax dues constituted a first charge against the company and,
therefore, the bank could not have taken possession of the mortgaged
properties and sold them. The bank filed a writ petition contending that in
view of the conflict between S. 38-C of the Bombay Act and S. 35 of the
Securitisation Act, the latter being a Central legislation, the first charge
created by the State Act could not have priority over debts of the bank. The
High Court held that since there was no provision in the Securitisation Act
providing for first charge in favour of the banks, S. 35 of the Securitisation
Act would not be held to override S. 38-C of the Bombay Sales Tax Act.
The Supreme Court held that Article 245 of the Constitution
is the source of legislative power of Parliament and the State Legislatures.
The legislative fields of Parliament and the State Legislatures have been
specified in Article 246. The combined effect of the different clauses of
Article 246 is that in respect of any matter falling within List I, Parliament
has exclusive power of legislation, whereas the State Legislature has
exclusive power to make laws for such State or any part thereof with respect
to any of the matters enumerated in List II in Schedule VII and with respect
to the matters enumerated in List III, both Parliament and the State
Legislature have power to make laws.
Article 254 contains mechanism for resolution of conflict
between the Central and State legislations enacted with respect to any matter
enumerated in List III of Schedule VII.
There is no provision in the DRT Act or the Securitisation
Act by which first charge has been created in favour of banks, financial
institutions or secured creditors qua the property of the borrower.
U/s.13(1) of the Securitisation Act, limited primacy has
been given to the right of a secured creditor to enforce security interest
vis-à-vis S. 69 or S. 69-A of the Transfer of Property Act. In terms of S.
13(1), a secured creditor can enforce security interest without intervention
of the Court or Tribunal and if the borrower has created any mortgage of the
secured asset, the mortgagee or any person acting on his behalf cannot sell
the mortgaged property or appoint a receiver of the income of the mortgaged
property or any part thereof in a manner which may defeat the right of the
secured creditor to enforce security interest.
In an apparent bid to overcome the likely difficulty faced
by the secured creditor which may include a bank or a financial institution,
Parliament incorporated the non obstante clause in S. 13,
Securitisation Act, 2002 and gave primacy to the right of secured creditor
vis-à-vis other mortgagees who could exercise rights u/s.69 or u/s.69-A of
the Transfer of Property Act. However, this primacy has not been extended to
other provisions like S. 38-C of the Bombay Act and S. 26-B of the Kerala Act
by which first charge has been created in favour of the State over the
property of the dealer or any person liable to pay the dues of sales tax, etc.
S. 13(7) which envisages application of the money received by the secured
creditor by adopting any of the measures specified u/s.13(4) merely regulates
distribution of money received by the secured creditor. It does not create
first charge in favour of the secured creditor.
The non obstante clauses contained in S. 34(1) of
the DRT Act and S. 35 of the Securitisation Act 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 the Securitisation Act, the provisions contained in those
Acts cannot override other legislations. S. 38-C of the Bombay Act and S. 26-B
of the Kerala Act also contain non obstante clauses and give statutory
recognition to the priority of the State charge over other debts, which was
recognised by Indian High Courts even before 1950. In other words, those
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.
Thus the appeals were dismissed.
