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of <h1>State sales tax first charge over dealer property prevails over bank security interests despite Section 35 SARFAESI non obstante</h1> SC held that State sales tax laws creating a statutory first charge over a dealer's property for tax dues are not inconsistent with the DRT Act or the ... SALES TAX—RECOVERY OF TAX—BANKS AND FINANCIAL INSTITUTIONS—RECOVERY OF DEBTS—PRIORITY AS BETWEEN SALES TAX DUES AND DUES OWED TO BANKS AND FINANCIAL INSTITUTIONS 1. ISSUES PRESENTED AND CONSIDERED 1. Whether provisions in central legislation for recovery of debts and enforcement of security interest (the DRT Act and the Securitisation Act) are inconsistent with State enactments creating a statutory 'first charge' on a debtor's property for sales-tax arrears (e.g., sections equivalent to section 38C/Bombay and 26B/Kerala), thereby invoking the non obstante clauses in the central Acts to give primacy to banks/secured creditors. 2. Whether the non obstante clauses in the DRT Act (s.34(1)) and the Securitisation Act (s.35) operate to override State statutory first charges in the absence of any express provision in those central Acts creating a statutory first charge in favour of banks/secured creditors. 3. Whether the DRT Act or the Securitisation Act themselves create a statutory first charge in favour of banks, financial institutions or secured creditors. 4. Whether a prior mortgage/charge in favour of a bank has priority over a subsequently enacted statutory first charge in favour of the State; and whether the State statutory first charge operates retrospectively to affect pre-existing private charges, decrees or mortgages. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Conflict between central recovery/enforcement Acts and State statutory first-charge provisions; applicability of non-obstante clauses Legal framework: Distribution of legislative fields (Arts. 245, 246) and repugnancy mechanism (Art. 254). DRT Act (exclusive jurisdiction for recovery; s.34(1) non obstante); Securitisation Act (enforcement without court intervention; s.35 non obstante). State sales-tax Acts create statutory first charge with their own non obstante language. Precedent treatment: Authorities establish that Art.254 applies where both Central and State laws relate to Concurrent List matters; List I (Union) generally prevails over List II (State) only by virtue of the non obstante clause in art.246(1) when entries overlap or by application of pith and substance. Decisions recognising statutory priority of tax/revenue dues (Builders Supply; Dena Bank; State Bank of Bikaner & Jaipur; State of M.P. v. State Bank of Indore) are authoritative on priority of State dues. Interpretation and reasoning: The Tribunal and Securitisation enactments arise under List I entry 45; State sales-tax laws arise under List II entry 54. Article 254 is not attracted where enactments originate in different Lists unless pith and substance analysis yields unavoidable overlap. Examination of the two central Acts in context shows they create machinery for speedy recovery and enforcement but do not, either expressly or by necessary implication, create a statutory first charge in favour of banks/secured creditors over a debtor's property. Ratio vs. Obiter: Ratio - where the central Acts do not themselves create a first charge, their non-obstante clauses cannot be invoked to nullify a State statutory first charge; DRT/Securitisation machinery does not impliedly displace State first-charge provisions. Observations on contextual interpretation, legislative history and purpose are part of the reasoning supporting the ratio. Conclusions: There is no inconsistency between the central recovery/enforcement Acts and State statutory first-charge provisions so as to attract the central non-obstante clauses; State first charges remain operative unless and until Parliament creates a competing statutory priority in favour of banks or a Central Act otherwise plainly intends to override. Issue 2 - Scope and effect of non-obstante clauses in the DRT and Securitisation Acts Legal framework: Non-obstante clauses give overriding effect 'notwithstanding anything inconsistent therewith contained in any other law'. Interpretation must be contextual and limited to the legislative intent (Madhav Rao; Aswini Kumar Ghose; R.S. Raghunath). Precedent treatment: Non-obstante clauses are potent but are not to be read as co-extensive with the operative part if context/ legislative scheme shows a narrower intent. Prior cases hold subsequent specific statutory priorities prevail; where Parliament intended priority it enacted explicit first-charge provisions (e.g., EPF s.11(2), Companies Act s.529A, Workmen's Compensation s.14A). Interpretation and reasoning: The non-obstante clauses in the DRT and Securitisation Acts operate only to the extent of inconsistency. Because the central Acts lack any provision creating a statutory first charge in favour of banks/secured creditors, there is no provision to be overridden; the non-obstante clauses therefore cannot be employed to negate State statutory first charges. Legislative history (Tiwari/Narasimham/Andhyarujina reports) shows Parliament deliberately empowered extra-procedural remedies but did not, despite awareness of judicial precedents recognizing State priority, enact a statutory first-charge in favour of banks or secured creditors. Ratio vs. Obiter: Ratio - non-obstante clauses do not have blanket effect; they cannot be used to override State statutory first charges where central Acts do not themselves create rival first-charge rights. The explanatory material about committees and parliamentary omission is integral to this ratio. Conclusions: The scope of s.34(1) and s.35 is bounded by the operative provisions of the Acts; non-obstante language cannot be stretched to produce an outcome Parliament did not expressly provide. Issue 3 - Whether DRT Act or Securitisation Act create a statutory first charge in favour of banks/secured creditors Legal framework: Statutory creation of priority is normally explicit (e.g., EPF, Companies Act). DRT Act defines 'debt', creates exclusive tribunals, summary procedure and recovery modes but contains no provision constituting a statutory first charge. Securitisation Act empowers secured creditors to enforce security and take possession/sale but its provisions regulate enforcement and distribution of proceeds rather than create a statutory priority over governmental first charges. Precedent treatment: Courts have consistently treated DRT and Securitisation remedies as additional/summary mechanisms (Allahabad Bank; Transcore) but have not read them as creating new statutory priorities vis-à-vis State first charges unless Parliament has expressly done so. Interpretation and reasoning: Detailed analysis of section 13(7),(9) and provisos shows distribution rules and protections for workers' dues (re: s.529A) but do not create a first charge in favour of secured creditors. The Securitisation Act's non obstante vis-à-vis TP Act s.69/69A grants primacy over those private rights only to the extent necessary to effect enforcement without courts; it does not purport to displace statutory first charges created under other laws. Ratio vs. Obiter: Ratio - neither Act creates a statutory first charge in favour of banks/secured creditors; their remedial and procedural schemes do not, by themselves, alter substantive priority vis-à-vis State statutory charges. Conclusions: Absent an express statutory provision in the two Acts creating a first charge, banks/secured creditors do not acquire statutory priority qua State first-charge claims merely by invoking DRT or Securitisation remedies. Issue 4 - Priority between prior private mortgages/charges and subsequently enacted State statutory first charges; retrospectivity Legal framework: Distinction between mortgage (transfer of interest) and charge (security without transfer of interest) under the Transfer of Property Act; treatment of statutory first charges in central and State statutes (EPF, Companies Act, Sales Tax Acts). Principle: Parliament may enact later provisions that alter priority relationships; statutory first charges operate on the debtor's property as a whole unless limited by the statute. Precedent treatment: Dattatreya Shanker Mote clarified mortgage vs charge; State Bank of Bikaner & Jaipur and State of M.P. v. State Bank of Indore held that a statutory first charge created by State/central statute operates over the entire property (including mortgagee's interest) and thus has precedence over existing mortgages/charges where statute so provides. State practice and Supreme Court authorities recognise priority of Government debts founded on rule of necessity/public policy (Builders Supply; Dena Bank). Interpretation and reasoning: Statutory first charges in sales-tax statutes are expressed to be first charge on the property and have been historically recognised as overriding private charges. Where a State inserts a statutory first charge, it operates with effect from the date specified and, as held, may operate against existing private charges in force on that date (State of M.P. case). The Contractual/private mortgagee's equity of redemption does not exclude the statutory reach of a first charge unless statute expressly limits its scope. Ratio vs. Obiter: Ratio - a statutory first charge created by State law over the debtor's property will, where the statute so declares, operate over existing mortgages/charges and have priority; such statutory changes need not be treated as impermissibly retrospective when Parliament/State has enacted them to operate against charges in force on the date of enactment. Conclusions: A prior private mortgage or unexecuted decree does not necessarily defeat a subsequently enacted statutory first charge; State statutory first charges can and do prevail over prior private charges when the statute manifestly creates such priority and is operative as to charges then in force. Application to the appeals and final conclusions Legal reasoning applied to the facts: Where State revenue authorities had validly created and sought to enforce statutory first charges under State sales-tax or revenue-recovery laws, central recovery or enforcement steps taken by banks/secured creditors under DRT or Securitisation remedies did not displace the State's statutory priority. High Court decisions upholding State first-charge priority were consistent with the principles articulated above. Final conclusions (binding holdings): (a) The DRT Act and the Securitisation Act do not create statutory first charges in favour of banks/financial institutions/secured creditors; (b) the non-obstante clauses in those Acts cannot be invoked to override State statutory first charges in sales-tax laws where no competing statutory priority in favour of banks exists in the central Acts; (c) statutory first charges created by State sales-tax laws prevail as declared by those statutes and by precedent, including over prior private mortgages/charges where the statute so provides; and (d) where recovery/enforcement under central Acts is sought, banks remain free to pursue other available remedies, but they cannot nullify State statutory first-charge rights by implication of the DRT or Securitisation statutes.
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