Secured Creditors' Rights Prevail Over State Tax Claims; Auction Purchasers Get Clear Titles Per Court Ruling.

The HC ruled in favor of the secured creditors, holding that their rights under the SARFAESI Act and RDB Act take precedence over the State's 'First Charge' claims under the KGST Act and KVAT Act. The court quashed the State's actions to seize and sell properties for tax arrears, affirming that auction purchasers are entitled to properties free of encumbrances. The court directed the Revenue authorities to register sale certificates in favor of auction purchasers and allow them to pay property taxes, thereby prioritizing the recovery rights of secured creditors over tax claims.

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Issues Involved:
1. Conflict between the rights of secured creditors under the SARFAESI Act and RDB Act versus the State's claim of 'First Charge' under the KGST Act and KVAT Act.
2. The legal interpretation of 'First Charge' versus 'priority of debts'.
3. The effect of non-notification of Section 26E of the SARFAESI Act.
4. The applicability of Section 37 of the SARFAESI Act regarding the coexistence of other laws.
5. The rights of auction purchasers under the SARFAESI Act and RDB Act.

Detailed Analysis:

1. Conflict between the rights of secured creditors under the SARFAESI Act and RDB Act versus the State's claim of 'First Charge' under the KGST Act and KVAT Act:
The core issue in these writ petitions is the conflict between the rights of secured creditors under Section 26E of the SARFAESI Act and Section 31B of the RDB Act, and the State's claim of 'First Charge' over properties for tax arrears under Section 26B of the KGST Act and Section 38 of the KVAT Act. The court examined these provisions and found that the SARFAESI Act and RDB Act unequivocally declare that the debts due to secured creditors shall be paid in priority over all other debts, including taxes. The KGST Act and KVAT Act, on the other hand, assert a 'First Charge' over the properties for tax arrears. The court concluded that the secured creditors' rights under the SARFAESI Act and RDB Act prevail over the State's 'First Charge' due to the later enactment of these provisions by the Parliament, which takes precedence under Articles 246(1) and 254 of the Constitution of India.

2. The legal interpretation of 'First Charge' versus 'priority of debts':
The court delved into the legal definitions of 'Charge' and 'Mortgage' under the Transfer of Property Act and concluded that a 'Charge' does not create any right over the property but allows the charge holder to deal with the property similarly to a simple mortgagee. The court emphasized that the terms 'First Charge' and 'priority in payment of debts' are virtually synonymous, both granting the holder the privilege of recovery before anyone else. Consequently, even though the KGST Act and KVAT Act create a 'First Charge' in favor of the Revenue, the provisions of the SARFAESI Act and RDB Act elevate the rights of secured creditors to recover their dues in priority over such taxes.

3. The effect of non-notification of Section 26E of the SARFAESI Act:
The court addressed the argument regarding the non-notification of Section 26E of the SARFAESI Act. It referred to the Supreme Court's judgment in Mar Appraem Kuri Company Limited, which clarified that the concepts of 'primacy of legislation' and 'repugnancy' are invoked as soon as the Parliament 'makes' a Statute, even before it is notified. Therefore, the court held that the non-notification of Section 26E does not affect the priority of secured creditors' rights. Additionally, Section 31B of the RDB Act, which has been notified, provides the same priority to secured creditors, rendering the Revenue's argument moot.

4. The applicability of Section 37 of the SARFAESI Act regarding the coexistence of other laws:
The court examined whether the provisions of the KGST Act, KVAT Act, or the Kerala Revenue Recovery Act (RR Act) could obtain protection under Section 37 of the SARFAESI Act. It referred to the Supreme Court's judgment in Madras Petrochem Limited, which clarified that Section 37 of the SARFAESI Act does not bar the application of other laws but limits their scope to laws related to the securities market. Consequently, the court concluded that the Revenue cannot claim protection under Section 37 of the SARFAESI Act to recover tax arrears in priority over secured creditors.

5. The rights of auction purchasers under the SARFAESI Act and RDB Act:
The court addressed the rights of auction purchasers who had bought properties under the SARFAESI Act and RDB Act. It held that auction purchasers are entitled to own and possess the properties free of all charges and encumbrances, as the secured creditors' rights to recover their debts in priority prevail over any attachments made by the Revenue. The court directed the Revenue authorities to effect the transfer of registry of the properties in favor of the auction purchasers and to permit them to remit the property tax, notwithstanding the attachments effected by the Revenue.

Conclusion:
The court allowed the writ petitions filed by the Banks and Financial Institutions, quashing the actions of the State's Revenue Machinery in taking possession of and attempting to sell the properties for tax arrears. It declared that the secured creditors' rights under the SARFAESI Act and RDB Act take precedence over the State's 'First Charge' under the KGST Act and KVAT Act. The court also directed the Revenue authorities to register the sale certificates in favor of the auction purchasers and to permit them to remit the property tax, thereby affirming the priority of secured creditors' rights in recovering their dues.

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