Bank's Right Of Recovery Under RDB Act Prevails Over State's Right Under VAT Act Due To Priority Given To Secured Creditors: AP High Court
The Andhra Pradesh High Court has upheld the right of Central Bank of India (petitioner) to recover its secured debts by sale of the mortgaged assets under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), and has ruled that it assumes priority over the claims of the State Government for recovery of dues under the Andhra Pradesh Value Added Tax Act, 2005 (AP VAT Act).On account...
The Andhra Pradesh High Court has upheld the right of Central Bank of India (petitioner) to recover its secured debts by sale of the mortgaged assets under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), and has ruled that it assumes priority over the claims of the State Government for recovery of dues under the Andhra Pradesh Value Added Tax Act, 2005 (AP VAT Act).
On account of specific statutory provisions that granted secured creditors priority over other debts and government dues, a Division Bench of Chief Justice Dhiraj Singh Thakur and Justice Ravi Cheemalapati held,
“…it can be seen that now there is a specific provision providing for priority in favour of the secured creditors, to realize the secured debts, due and payable to them, over all other debts and Government dues, we have no hesitation to hold that the right of the petitioner Bank to recover its dues by sale of the secured asset would have priority over the arrears which were sought to be recovered by the respondent State under the provisions of the A.P. Value Added Tax Act, 2005.”
Facts:
The Central Bank of India (petitioner) had advanced certain loans to M/s Sri Rajarajeswari Raw and Boiled Rice Mill (Respondent 3), a firm in which Respondent 4 to 6 were partners, against certain security documents and mortgage deeds. Upon failure to repay the loan, proceedings for recovery were initiated before the Debts Recovery Tribunal, Hyderabad, under the RDB Act. A decree was passed in favour of the petitioner Bank on 22.07.2022, and a recovery certificate for recovery of an amount of Rs.79,74,57,988.09/- was issued on 06.09.2022. Additionally, failure to pay decretal amount led the Recovery Officer to issue an order of attachment, dated 27.02.2023, attaching the secured properties. Valuation reports assessed the value of property at approximately Rs.39.89 crores and distress sale value was calculated at approximately Rs.29.89 crores.
The petitioner alleged that some of the mortgaged properties affixed were sought to be sold by an order dated 02.04.2024, issued under the AP VAT Act. It was stated that the Commercial Tax Officer had finalised the assessments by levying a demand of Rs.15,02,102/- for assessment year 2015-16 by an order, dated 31.12.2019 and an amount of Rs.13,91,168/- for 2016-17, on 05.11.2020.
Submissions:
Against this backdrop, the petitioner Bank submitted that the Bank has priority over all other debts and Government dues, revenues, taxes due to the Government in terms of Section 31-B of the RDB Act. He relied on Section 34 of the RBD Act to emphasise that the RDB Act would have an overriding effect over any other law for the time being in force.
On the other hand, the Deputy Commercial Tax Officer II (Respondent 2) submitted that in terms of Section 26 of the AP VAT Act, the Commercial Taxes Department would have a preferential claim over the assets of a VAT Dealer or a turnover tax dealer or any other dealer, and that the Government would have the first charge over the property of such a dealer.
Court's Findings:
For reference, Section 31B of RDB Act enacts that notwithstanding anything contained in any other law, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues payable to the Central Government, State Government or local authority. Further, Section 34 states that provisions of the RDB Act shall have “effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act”
On the other hand, Section 26 of the AP VAT Act prescribes that notwithstanding anything contrary contained in any law, any amount of tax, including deferred tax which is treated as loan extended by the Government, penalty, interest and any other sum payable by a VAT dealer or TOT dealer or any other dealer, shall be the first charge on the property of the VAT dealer or TOT dealer or any other dealer.
Thus, the core issue tabled before the Court for its consideration was whether the Bank's secured interest, under Section 31B r/w Section 34 of RDB Act, has priority over the tax claim made by Respondent 2 under Section 26 of the AP VAT Act, on the property of Respondents 3 to 6.
Relying on an earlier judgment of the Supreme Court in Central Bank of India v. State of Kerala [(2009) 4 SCC 94], the Division Bench held that in the presence of a specific provision providing for priority in favour of the secured creditors to realise the secured debts, the right of the Bank to recover its dues would assume priority over recovery of arrears of Government due payable to the State under the AP VAT Act.
The petition was accordingly allowed.
Case Details:
Case Number: WRIT PETITION NO: 12247 of 2024
Case Title: Central Bank of India v. The State of Andhra Pradesh and others