2007 (12) TMI 454 - HC - Central Excise

Court rules in favor of secured creditors over Department of Customs & Central Excise in recovery dispute

The court clarified that the Department of Customs and Central Excise does not have priority over secured creditors but only over non-secured creditors. ... Priority of State/central revenue dues vis-a -vis secured creditors - lien or first charge claimed by revenue over seized goods - power to sell mortgaged property under Section 29 of the State Financial Corporations Act, 1951 - availability of temporary injunction against a secured creditor acting under statutory powerPriority of State/central revenue dues vis-a -vis secured creditors - priority of State over secured creditors - The Department of Customs and Central Excise does not have priority over the secured creditor in respect of the mortgaged plots sold by the secured creditor under its statutory power. - HELD THAT: - The Court accepted the submissions of the secured creditor that, relying on earlier decisions including Sicom Ltd. v. Union of India, Syndicate Bank and another v. The Official Liquidator and others and the Apex Court decision noted as AIR 1967 SC 1831, the State or Central Government does not have priority over secured creditors for recovery of its dues. The learned trial Court's conclusion that the Department had a lien or first charge such as to displace the rights of the secured creditor was rejected. Consequently, the Department cannot claim precedence over amounts realised by the secured creditor from sale of the mortgaged property.The claim of priority by the Department of Customs and Central Excise over the secured creditor in respect of the two mortgaged plots is negatived.Power to sell mortgaged property under Section 29 of the State Financial Corporations Act, 1951 - availability of temporary injunction against a secured creditor acting under statutory power - Defendant No.2 is entitled to proceed to sell the mortgaged plots under Section 29 of the State Financial Corporations Act, 1951 and the Department is not entitled to a temporary injunction restraining such sale. - HELD THAT: - The Court found that defendant no.2 had validly attached the mortgaged plots and, having acted under Section 29 of the Act to recover the loan due to it, was entitled to sell the property in accordance with the statutory provisions. The Court observed that no relief had been sought in the plaint against defendant no.2 and that the Department's contention that it would have precedence over amounts realised on sale did not provide a basis to restrain the secured creditor. Therefore, injunctive relief preventing defendant no.2 from dealing with the property was not warranted.Defendant No.2 may deal with and sell the two mortgaged plots, including factory premises, plant and machinery, in accordance with Section 29 of the Act; injunction refused.Final Conclusion: The appeal is allowed; the impugned order dated 30-6-2007 is set aside. Defendant No.2 is entitled to deal with and sell the mortgaged plots under Section 29 of the State Financial Corporations Act, 1951, and the Department of Customs and Central Excise has no priority to restrain that action. Issues: Priority of dues between Department of Customs and Central Excise and secured creditors, validity of temporary injunction against defendant no.2.Analysis:1. Priority of Dues: The case involved a dispute over the priority of dues between the Department of Customs and Central Excise and a secured creditor, defendant no.2. The Department sought to recover a sum from defendant no.1, who had mortgaged plots to defendant no.2 for a loan. Defendant no.2 had attached the plots under the State Financial Corporation Act, intending to sell them to recover the loan amount. The Department claimed precedence over the dues that defendant no.2 would receive from selling the plots. The court referred to legal precedents, including Sicom Ltd. v. Union of India and Syndicate Bank v. The Official Liquidator, to establish that the State does not have priority over secured creditors but only over non-secured creditors. As defendant no.2 had acted within the provisions of the Act, the Department had no grounds to obtain a temporary injunction against defendant no.2.2. Validity of Temporary Injunction: The court found that the Department of Customs and Central Excise had not sought any relief against defendant no.2 in their plaint. As defendant no.2 was entitled to deal with the plots in accordance with the law to recover their dues, the court set aside the impugned order dated 30-6-2007. Consequently, defendant no.2 was granted the right to manage the plots, including the factory premises and machinery, as per the provisions of the State Financial Corporation Act. The appeal was allowed in favor of defendant no.2 based on these findings.In conclusion, the judgment clarified the priority of dues between the Department of Customs and Central Excise and secured creditors, emphasizing the rights of the latter under the State Financial Corporation Act. It also highlighted the importance of seeking appropriate relief in legal proceedings and upheld the rights of defendant no.2 to deal with the mortgaged plots for the recovery of their dues.