CIVIL APPEAL 6524 of 2014 on 22 December 1997

1. M/s.Maxwell Exim Pvt.Ltd.,Rep.by its DirectorV.P.Haran5th Floor, Royala Tower III781, Anna Salai, Chennai -2.

2. M/s.Anderson IndustrialInternational Limited5th Floor, Royala Tower III781, Anna Salai, Chennai -2.

3. M/s.Enkay Foods Ltd.5th Floor, Royala Tower III781, Anna Salai, Chennai -2.

...Respondents/Defendants

A.No.6524 of 2014:

Asset Reconstruction Company (India) Limitedhaving its registered office atThe Ruby, 10th Floor

29, Senapati Bapat MargDadar (West) Mumbai - 400 028.

...Applicant(3rd Party Mortgagee)

-Vs-

1. Tamil Nadu Co-operative Marketing Federation LimitedRep.by its Secretary Mr.G.ChandrasekaranNo.91, St.Mary's RoadChennai - 600 018.

...1st Respondent/Plaintiff

2. Maxwell Exim Pvt.LimitedRep.by its Director Mr.V.P.HaranHaving office at 5th Floor,Royala TowersIII, 781 Anna SalaiChennai 600 002.

...2nd Respondent...3rd Respondent

3. M/s.Anderson Industrial International LtdHaving office at 5th Floor, Royala TowersIII, 781 Anna Salai, Chennai 600 002.

4. M/s Enkay Foods LtdHaving office at 5th Floor, Royala TowersIII, 781 Anna Salai, Chennai 600 002....4th Respondent/RespondentsApplication praying that this Hon'ble Court be pleased to set aside the order dt:22.12.1997 attachment made in Application No.1814 of 1997 in C.S.No.304 of 1997.

These applications coming on this day before this court for hearing the court made the following order:

This application is filed by a third party challenging the order of attachment dated 22.12.1997 passed in A.No.1814 of 1997 in C.S.No.304 of 1997.

2. Much water has flown under the bridge since the filing the fitness of things to recapitulate the sequence of relevant dates and events as germane to the present applications as well as the suit.

by Maxwell Exim Pvt. Limited, the first defendant in the suit, from Indian Bank and land and buildings owned by it were offered to the Bank as security. An equitable mortgage thus came to be created by deposit of title deeds in terms of section 58(f) of the Transfer of Property Act 1882.

(ii) On account of the defaults in repayment of the loans advanced by the debtor, Indian Bank approached the Debt Recovery Tribunal, (DRT) Chennai in O.A.Nos.66 and 67 of 1997 filed on 28.01.1997, subsequently transferred to DRT-II and renumbered as O.A.Nos.405 and 408 of 2001.

(iii) Separately, the Tamil Nadu Co-operative Marketing Federation Limited (in short ‘TANFED’), had filed a suit on

19.05.1997 in C.S.No.304 of 1997 arraying three defendants therein, D1 being the first respondent in this application. The prayer in the suit was for a decree and judgement directing D1/R1 herein to pay a sum of Rs.9,30,64,953.26 to the plaintiff with interest at the rate of 18.5% per annum from the date of plaint till the date of realisation and costs of the suit.

attachment in A.No.1814 of 1997 filed in the suit, granted an order of attachment before judgment.

decreed as prayed for by the plaintiffs. The decree was exparte. (vi) TANFED sought execution of the decree in E.P.No.15 of 2005 before the District Court Chengalpet.

Decree and the Execution Petition filed by TANFED, filed E.A.No.30 of 2006 challenging the Execution Proceedings filed by TANFED on the ground that Indian Bank was a secured creditor.

(viii) On 07.12.2007 the entire debt came to be assigned by Indian Bank along with the underlining securities offered by D1 and one MVR Industries to The Asset Reconstruction Company (India) Limited (in short ‘ARCIL’). The assignment was in terms of section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(in short ‘SARFAESI Act’) vide two registered deeds of assignment. The assignment deeds were registered before the Sub-Registrar, Joint I, Saidapet. By operation of section 5 of the SARFAESI, ARCIL thus stepped into the shoes of Indian Bank and pursued the claim on its behalf.

District Court, Chengalpet came to be transferred to the District Court, Kancheepuram in 2010 and was re-numbered as E.P.No.97 of 2010. Simultaneous therewith, E.A.No.30 of 2006

filed by the Indian Bank stood transferred and re-numbered as E.A.No.5 of 2010.

by ARCIL before this Court seeking the lifting of the attachment granted by this Court on 22.12.1997. On 18.11.2014 the application was allowed and the attachment lifted.

(xi) Thereafter an application appears to have been filed in A.No.3478 of 2017 wherein TANFED points out that the vakalat filed by the counsel on record for ARCIL was irregular, since it had not been signed by the applicant. Considering the same, order dated 18.11.2014 was set aside and the matter directed to be re-heard. A.No.3478 of 2017 came to be allowed on 17.08.2017.

(xii) On 07.12.2014 E.A.No.12 of 2010 filed by ARCIL seeking substitution of itself in the place of Indian Bank in

E.A.No.5 of 2010 was allowed in the presence of learned counsel for TANFED, uncontested.

(xiii) On 31.03.2017 O.A.No.408 of 2001 filed by the Indian Bank against Maxwell Exim was decreed. The application filed by TANFED to implead itself in the proceedings before the DRT was dismissed. An appeal was filed by TANFED challenging the aforesaid order, which has also been dismissed by the First Bench of this Court.

properties of D1 and MVR Industries passed by the Commercial Taxes Department stood quashed by this Court in W.P.Nos.2711 and 2792 of 2017.

(xv) On 18.07.2017, an order of attachment of the properties of D1 and MVR Industries passed by the Income Tax Department stood quashed by this Court in W.P.No.3572 of 2017 and W.P.Nos.34703 and 35703 of 2016.

(xvi) On 17.08.2017, A.No.3478 of 2017 filed by TANFED

challenging order dated 18.11.2014 passed in A.No.6524 of 2014

was allowed on the ground that the vakalat filed by the applicant in the said application was irregular. The applicant was granted leave to regularise the same which was done and the application was taken up for hearing afresh in August, 2018.

4. Detailed submissions of Mr.AR.L.Sundaresan, learned senior counsel and Mr.P.S.Raman, learned senior counsel

appearing for Mr.Akhil R.Bhansali, learned counsel for ARCIL and Dr.Chellaiah, learned senior counsel appearing for Mr.J.Milton Arul Rajendran, learned counsel for TANFED, the 2[nd], 3[rd] and 4[th ]respondents being unrepresented have been heard.

5. The sequence of facts as set out above are not in dispute. The applicant prays for setting aside of the order of attachment dated 22.12.1997 mainly on the ground that the applicant is a secured creditor and that such security interest has been created even prior to the date on which cause of action arose for filing of C.S.No.304 of 1997 by TANFED. Reliance is placed on section 26-E of the SARFAESI Act.

6. ARCIL relies on following judgment/decisions in respect of its proposition that, as secured creditor, it would have priority of charge, particularly seeing as the charge was created prior to the order of attachment before judgment:Purna Chandra Basak Vs. Daulat Ali Mollah reported in 1973 SCC Online Cal 91: AIR 173 Cal 432 Vannarakkal Kallalathil Sreedharan Vs. Chandramaath Balakrishnan and another (1990) 3 SCC 291 Syndicate Bank Vs. National Wire products and others 1993 SCC Online Guj 61 My Forex Services (P) Ltd. v. City Men Forex and Travels & Ors AIR 2008 MAD 42

7. In counter, TANFED relies on the judgment and decree passed in C.S.No.304 of 1997 on 13.12.2002 wherein the defendant

was ordered to pay a sum of Rs.18,88,90,620.34 with interest at the rate of 18.5% from the date of decree till the date of realisation, the decree making it clear that the order of attachment shall continue to be in force. The aforesaid decree has attained finality and has not been challenged.

Section 26 E is not available as sought by ARCIL since such protection would be subject to the conditions laid out in 26 B, C & D that have not been satisfied. Further the provisions of Order XXI Rule 58 protect the claim of TANFED. According to TANFED, the assignment agreements have not been executed in a proper manner, the procedure adopted by the Bank for creation of the mortgage was incorrect and untenable and there has been rank collusion between the Bank/ARCIL and the 1[st] defendant in the

entire transaction. The decisions relied upon by ARCIL are stated to be distinguishable in law and on facts.

10. The applicant, ARCIL, has filed the details of the lands offered as security by the 1[st] defendant and MVR Industries Ltd to Indian Bank along with the assignment agreements under which the said properties were assigned to it. Dr.Chellaiah points out that there are discrepancies in the details furnished and circulates, for his part, a fresh set of details relating to the properties under attachment. He has also made elaborate submissions on the discrepancies itself, drawing the attention of the court to the survey numbers and extents of land mentioned in the Deeds of assignments.

11. This Court makes it clear that it is not concerned with the factual details of the properties assigned to ARCIL but is rather, considering the legal proposition of priority when it comes to enforcement of the charge. Two deeds of assignment, both dated December 7, 2007, and duly registered are placed on record containing comprehensive details of the properties that

have been offered as security. This Court makes it clear that the right of ARCIL, should this Court hold that it has such right in these proceedings, would be restricted to only and specifically the lands mortgaged to Indian Bank by the 1[st ]defendant in the suit under the aforesaid deeds of assignment.

12. I also make it clear that I am not concerned with the properties offered as security by MVR Industries since the said entity is not a party to the present proceedings.

13. Having heard the learned counsel in some detail, I am of the considered view that the claim of ARCIL is liable to be accepted for the reason that ARCIL is admittedly a secured creditor holding a charge created even prior to the grant of the attachment, entitled to the protection available under Section 26E of the SARFAESI Act.

14. Though the merits or otherwise of the transactions as regards the 1[st] defendant in suit and ARCIL is not a matter that concerns me, I may mention for the sake of completion that the transactions have been duly taken into consideration by the Debt Recovery Tribunal in its orders dated 31.03.2017. The attempts of TANFED to implead itself in the proceedings before the DRT

were unsuccessful and this Court has also rejected the request for impleadment.

15. The sole question then, that arises for my consideration in this Application, concerns the question of priority to be accorded - whether to the equitable mortgage created in the year 1991 or to the order of attachment before judgment passed by this Court in A. No.1814 of 1997 on 22.12.1997.

16. Section 26 E of the SARFAESI reads thus:

26-E.Prioritytosecuredcreditors.-Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rate payable to the Central Government or State Government or local authority.

Explanation: For the purpose of this Section, it is hereby clarified that on or after the commencement of the insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.

17. TANFED relies upon the provisions of Order XXI Rule 58

of C.P.C. reading as under:

'58. Adjudication of claims to, or Objections to attachment of, property:--(1) Where any claim is preferred to, or any objection is made to the attachment of, any property attached in execution of a decree on the ground that such property is not liable to such attachment, the Court shall proceed to adjudicate upon the claim or objection in- accordance with the provisions herein contained :

18. An examination of the cases cited at the Bar throws much light in regard to the controversy at hand. The Supreme Court in Vannarakkal Kallathil Sreedharan (supra) considered the title of a purchaser of property under an agreement of sale entered into prior to the grant of an order of attachment concluding that the conveyance under such contract of sale passes good title in spite of the attachment. Identical views taken by the Madras, Bombay, Calcutta and Travencore-Cochin High Courts were upheld.

19. A Division Bench of this Court in the case of M/s. S.U.S. Davey Sons V. P.M.Narayanaswami and another (96 Law Weekly 1) considered the priority of right as between an attachment holder and a mortgagee concluding on the facts of that case, that the right of sale exercised by the mortgagee would prevail over the attachment. In the case dealt with by the Bench the suit property had been subject to mortgage under a Deed dated 16.11.1967 that included the power of sale under Section 69 of the Transfer of Property Tax. A suit had been filed by a creditor who had obtained an order of attachment before judgment on 11.09.1970. While considering the question of priority, the Bench upheld the right of the mortgagee that was prior in point of time, holding that the attachment order obtained later would have no effect on the power of sale exercised by the mortgagee.

20. A Learned Single Judge of the Madras High Court in the case of My Forex Services (supra) has concluded likewise and along identical lines following the decision of the Division Bench of this Court in S.U.S Davey Sons (supra).

21. In the case of Purna Chandra Basak (supra) a learned Single Judge of the Calcutta High Court while considering the priority of charge emanating from agreement to sell an immovable property and a subsequent attachment before judgment held that the prior contractual right would prevail.

22. Likewise, in Syndicate Bank (supra) a learned Single Judge of the Gujarat High Court reiterated the settled position that an attachment does not in any way affect the prior rights of parties in respect of the disputed property.

23. The above judgement/decisions are distinguished by Dr.Chellaiah on the ground that those cases dealt with rights created by virtue of contract and are distinguishable from the present case from the charge created in favour of ARCIL. I am of the view that such distinction, if at all, can only work in favour of ARCIL and its rights as a secured creditor, in the light of the provisions of section 26 E of the SARFAESI.

24. A Full Bench of this Court had occasion to consider the provisions of Section 26 E of the SARFAESI in The Assistant Commissioner (CT) V. The Indian Overseas Bank and another

(W.P.Nos.2675 of 2011 etc. batch dated 10.11.2016) where the question framed for resolution by the Full Bench was as follows:

' a) As to whether the Financial Institution, which is a secured creditor, or the department of the government concerned, would have the 'Priority of Charge' over the mortgaged property in question, with regard to the tax and other dues.b) As to the status and the rights of the third party purchaser of the mortgaged property in question.'

25. The Bench by a short order (extracted below) has held unambiguously that the operation of Section 26-E is absolute and the provision would operate retrospectively covering even those transactions where the security charge was created prior to 2002 when the Section was inserted.

2. We are of the view that if there was at all any doubt, the same stands resolved by view of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Section 41 of the same seeking to introduce Section 31B in the Principal Act, which reads as under:- ''31B. Notwithstanding anything contained in any other law for the time being in force, 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 including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. Explanation. - For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.''

3. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to 4 the Central Government, State Government or Local Authority. This section introduced in the Central Act is with ''notwithstanding'' clause and has come into force from 01.09.2016.

4. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending.'

26. Before parting, I must advert to one more aspect of the matter. Dr.Chellaiah has pointed out that the TANFED is an Apex

society for the Agricultural Producers Co-operative Marketing Societies, constituted in terms of the Tamil Nadu Co-operative Societies Act 1983. According to him, TANFED being an Apex co-operative society addresses the welfare of the community engaged in agriculture and enforces principles and policies of fair play and equity in the marketing of agricultural produce. This is an aspect of the matter that, according to him, should weigh with the Court in deciding the issue at hand. Though an attractive submission, my view is that the argument must yield to the statutory prescription of Section 26 E as well as the well enshrined and settled principles of priority of charge.

From 25.09.2008 the Registry is issuing certified copies of the Order/Judgment Decree in this format.