2022 (7) TMI 527 - HC - Customs

Court dismisses writ appeal, directs Customs to release attachment, upholding Bank's priority over government dues.

The court dismissed the writ appeal, directing the appellant, the Customs Department, to lift the attachment over the property within two weeks. It held ... Priority of secured creditor under the SARFAESI Act - overriding effect of the SARFAESI Act over revenue recovery under Customs/Central Excise - secured creditor's first charge vis-a -vis Crown debt - effect of departmental communication to Registration authorities vs creation of statutory charge - rights of bona fide auction purchaser under SARFAESI salePriority of secured creditor under the SARFAESI Act - secured creditor's first charge vis-a -vis Crown debt - Whether the mortgage/hypothecation in favour of the bank (secured creditor) created prior to the Customs communication enjoys priority over the claim/attachment asserted by the Customs authorities. - HELD THAT: - The court found as a matter of fact that the mortgage in favour of the second respondent bank was created in 2006 and the bank initiated SARFAESI proceedings and took possession before issuing the sale notice and sale certificate to the auction purchaser. Applying the principle that, in the absence of a statutory provision creating a prior 'first charge' for Crown debts, a secured creditor's rights under the SARFAESI Act prevail, the court held that the bank's charge, being prior in point of time and arising under SARFAESI, has priority over the Customs claim. The court relied upon the Full Bench decision in UTI Bank Ltd. and the subsequent Supreme Court authority confirming that SARFAESI rights override ordinary revenue claims where no specific statutory first charge is provided to the revenue, and concluded that the bank's secured interest was not displaced by the Customs communication. [Paras 13, 16, 18]The mortgage/secured creditor's charge has priority over the Customs claim and prevails.Overriding effect of the SARFAESI Act over revenue recovery under Customs/Central Excise - effect of departmental communication to Registration authorities vs creation of statutory charge - Whether the Customs Department's communication (requesting Registrars not to entertain instruments) of 14.12.2010 operated as an attachment or created a charge defeating the bank's secured rights. - HELD THAT: - The court distinguished between a statutory attachment/charge and a departmental communication. It held that the Customs office had not registered an encumbrance or passed an order of attachment creating a statutory charge over the property, but merely sent a communication to registration authorities to safeguard recovery. The communication, which in any event listed adjacent survey numbers and included properties of the importers, did not operate to create a prior charge capable of defeating the bank's existing mortgage. The court therefore rejected the contention that the communication amounted to a charge prior to the bank's security that could override SARFAESI rights. [Paras 14, 15]The Customs communication did not create a statutory charge or attachment capable of displacing the bank's secured interest.Rights of bona fide auction purchaser under SARFAESI sale - Whether the first respondent, as a bona fide purchaser under the bank's SARFAESI auction sale and holder of a sale certificate, is entitled to registration free of the Customs claim. - HELD THAT: - The court accepted that the first respondent paid the sale consideration and was issued a sale certificate. The sale certificate itself acknowledged the bank's prior mortgage and stated that the bank's charge had priority; the bank explained any ambiguous language as a genuine mistake. Given the bank's prior secured interest and the legal principle that SARFAESI rights prevail over ordinary Crown debts in absence of a statutory first charge, the purchaser's rights arising from the bank's sale were upheld. Consequently, the registration impediment caused by the Customs communication had to be removed. [Paras 10, 15, 16]The bona fide auction purchaser is entitled to have the Customs attachment lifted and proceed to registration.Final Conclusion: The writ appeal is dismissed. The court affirmed that the bank's prior secured charge under the SARFAESI Act prevails over the Customs claim and directed the Customs authority to lift the attachment over the property within two weeks from receipt of the judgment. Issues Involved:1. Validity of the attachment order issued by the appellant.2. Priority of claims between the secured creditor (Bank) and the customs department.3. Applicability of Section 26E of the SARFAESI Act.4. Bona fide purchaser rights.5. Overriding effect of SARFAESI Act over other laws.Issue-Wise Detailed Analysis:1. Validity of the Attachment Order Issued by the Appellant:The appellant, the Customs Department, issued an attachment order on 14.12.2010 against the properties owned by M/s. Jai Bhavani Steels Enterprises Limited and M/s. SDS Steels Private Limited. This was done to safeguard the customs duty and interest recoverable from the importers. The first respondent, who purchased the property in an auction conducted by the second respondent Bank, challenged this attachment. The learned Judge noted that the appellant did not create a formal encumbrance or charge but merely sent a communication to the Inspector General of Registration. The court found that this communication could not stand in the way of the Bank, as a secured creditor, taking recourse under SARFAESI.2. Priority of Claims Between the Secured Creditor (Bank) and the Customs Department:The court observed that the second respondent Bank initiated SARFAESI proceedings and took possession of the secured asset before the customs department raised its attachment. The Bank's mortgage was created on 26.12.2006, while the customs department's attachment was much later on 14.12.2010. The court held that the Bank, being a secured creditor, had a prior claim over the customs department's dues. This was supported by the Full Bench decision in UTI Bank Limited v. Deputy Commissioner Central Excise, which held that the secured creditor's rights prevail over government dues unless there is a specific statutory provision to the contrary.3. Applicability of Section 26E of the SARFAESI Act:Section 26E of the SARFAESI Act provides that the secured creditor's charge over a property prevails over all other charges. The court found this section to be unambiguous and absolute in its obligation. The customs department's claim was subordinate to the Bank's mortgage, as the Bank's charge was created before the customs department's attachment. The court also referenced the Supreme Court decision in Punjab National Bank v. Union of India, which affirmed that the dues of a secured creditor have priority over government dues, including those of the Central Excise Department.4. Bona Fide Purchaser Rights:The first respondent was a bona fide purchaser, having bought the property in an auction sale conducted by the second respondent Bank and obtained a sale certificate after paying the full consideration. The court noted that the customs department's communication did not create a formal charge and thus could not affect the first respondent's rights as a bona fide purchaser. The court emphasized that the first respondent's purchase was legitimate and protected under the SARFAESI Act.5. Overriding Effect of SARFAESI Act Over Other Laws:The court reiterated that the SARFAESI Act has an overriding effect on other laws, including the Customs Act. This was supported by multiple judicial precedents, including the Supreme Court's decision in Union of India v. SICOM Ltd., which held that the SARFAESI Act's provisions prevail over other statutory claims unless specifically provided otherwise. The court concluded that the second respondent Bank, as a secured creditor, had a preferential right over the customs department's claims.Conclusion:The writ appeal was dismissed, and the appellant was directed to lift the attachment over the property within two weeks. The court affirmed that the secured creditor's rights under the SARFAESI Act take precedence over the customs department's claims, and the first respondent, as a bona fide purchaser, was entitled to have the property free from the customs department's attachment.