Auction purchaser liable to discharge outstanding statutory dues on a property under SARFAESI Act

A Division Bench of the Bombay High Court comprising Justices Sunil B. Shukre and Avinash G. Gharote in the matter of Medineutrina Pvt. Ltd. v. District Industries Centre and Others, REED 2021 Bom 02243, held that in receipt of sale proceeds, as per Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 the dues of the secured creditor will have priority over dues owed to the government, but the obligation to discharge dues under any Central/State/Local Act survives and therefore, the auction purchaser is liable to discharge the outstanding government dues. This post elucidates the factual background of the case, the issues involved and the ruling pronounced by the Bombay High Court.

BACKGROUND

M/s. Wood Stock Holdings (Wood Stock), the owner of a property, had availed loan from Punjab National Bank/ Respondent No. 3 (PNB), on account of non-payment of which action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was initiated by PNB, resulting in attachment of the above immovable property, which was put to auction. In the auction, the Medineutrina Pvt. Ltd (Petitioner) made the highest bid and accordingly, PNB issued a sale certificate in favour of the Petitioner. Thereafter, the Petitioner applied to the District Industries Center/Respondent No.1 (DIC) for issuance of a No Objection Certificate (NOC) to get the said property transferred in its name. The Petitioner was informed it will have to take NOC from the Sales Tax Department/Respondent No.2 as there were arrears of sales tax dues upon Wood Stock and also certain other documents were also directed to be submitted. 

Resultantly, the Petitioner filed a writ petition before the Bombay High Court challenging the action on part of DIC, in refusing to transfer the immovable property in its favour, unless the liability of the Sales Tax Department was discharged. Further, the Petitioner sought PNB to issue a NOC and also a fresh sale certificate, free from all encumbrances in its favour.

ANALYSIS

Placing reliance on a catena of rulings, including Cosmos Co-operative Bank v. State of Maharashtra and Ors 2019 SCC OnLine Bom 9527 and State Bank of India v The State of Maharashtra and others W.P. (ST.) No.92816/2020, the Bombay High Court noted that on a combined reading of Section 26-E of the SARFAESI Act and Section 37 of the Maharashtra Value Added Tax Act, 2002 it is clear that the rights of the secured creditor, to realize secured debts, due and payable to them by sale of assets in which security interest is created is given priority over all other debts and Government dues. However, the priority given in Section 26-E of the SARFAESI Act, to a secured creditor, only means that it is first in queue for recovery of its debts by sale of the property, the other creditors being relegated to second place and so on in the order of their preferences. Further, according to Bom HC, this does not have the effect of wiping out the dues payable under any Central/State/Local Act, where, for the recovery of such dues, a first charge has been created. Hence, when a statutory charge is created on the property, the same goes with the property and follows the property, in whosoever hands the property goes.

The Bombay High Court also rejected the Petitioner’s argument that since no notice of any charge was given to it by the Sales Tax Department and PNB, it was not liable for payment of any dues to them. The Bombay High Court observed that the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same. Further, it is the duty of the auction purchaser, before bidding for the property, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. Thus, after acquiring title to the property, the auction purchaser cannot claim that it will have the rights associated with the property and not the liabilities. Consequently, the Bombay High Court concluded that the Petitioner, who was the successful auction purchaser, was liable to pay the outstanding dues to the Sales Tax Department.

In view of the foregoing reasons, Bombay High Court found that the Petitioner was not entitled to the reliefs as claimed in the petition and accordingly, the writ petition was dismissed.