IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.95 OF 2005

Central Bank of India  … Appellant

Versus

State of Kerala and others … Respondents

WITH

C.A. No.2811 of 2006, C.A. No.3549 of 2006, C.A. No.3973 of 2006, C.A. No.4174 of 2006, C.A. No.4909 of 2006, C.A. No.1288/2007  and  C.A. No.1318_of 2009 [arising out of  S.L.P.(C ) No. 24767 of 2005]

J U D G M E N T

G.S. Singhvi, J.

1. Leave granted in S.L.P. (C) No.24767 of 2005.

2. Whether Section 38C of the Bombay Sales Tax Act, 1959 [for short “the

Bombay Act”] and Section 26B of the Kerala General Sales Tax Act, 1963 [for short

“the Kerala Act”] and similar provision contained in other State legislations by which

first charge has been created on the property of the dealer or such other person, who

is liable to pay sales tax etc., are inconsistent with the provisions contained in the

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short ‘the

DRT  Act’)  for  recovery  of  `debt’  and  the  Securitisation  and  Reconstruction  of

Financial  Assets  and  Enforcement  of  Security  Interest  Act,  2002  (for  short  ‘the

Securitisation Act’) for enforcement of `security interest’ and whether by virtue of

non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the

Securitisation Act, two Central legislations will have primacy over State legislations

are the questions which arise for determination in these appeals.    

3. For the sake of  convenience,  we have taken notice of  the facts of Civil

Appeal Nos.95/2005 and 2811/2006 and the reasons contained in the orders passed by

Kerala and Bombay High Courts, which are under challenge in these appeals.

4. C.A. No.95/2005 – Central Bank of India vs. State of Kerala & others –

Central Bank of India, which is a nationalized bank, gave cash/ credit facility to the

tune of Rs.12 lakhs to Kerala Refineries (P) Ltd.  The borrower executed mortgage of

movable and immovable properties for securing repayment.   As the borrower failed

to repay the dues, the bank filed civil suit bearing O.S. No.234/1996 in the Court of

Sub-Judge at Mavelikara.  Later on the suit was transferred to Ernakulam Bench of

the  Debts  Recovery Tribunal  (hereinafter  referred to  as  “the  Tribunal”).   By an

order dated 1.12.2000, the Tribunal decreed the suit for an amount of Rs.55 lakhs

with future interest.  As a sequel to this, Recovery Certificate dated 1.11.2001 was

issued in favour of the bank and the Recovery Officer issued notice for sale of the

movable  and  immovable  properties  of  the  borrower.   At  that  stage,  Tehsildar,

Mavelikara  issued  notice  dated  26.11.2001  to  the  borrower  for  recovery  of

Rs.40,38,481/- as arrears of sales tax stating therein that its moveable and immovable

properties had been attached on 2.2.2000 and 4.9.2000 and that steps are being taken

to sell the attached property by public auction.  The Tehsildar claimed that by virtue

of  Section  26B  of  the  Kerala  Act,  as  amended  by  Act  No.23/1999,  the  State

Government has got first charge over the attached properties. The bank challenged

the notice of the Tehsildar by filing a petition under Article 226 of the Constitution of

India,  which  was  registered  as  O.P.  No.7835/2002(G).   The  bank  relied  on  the

decisions  of this Court  in A.P.  State Financial  Corporation v.  Official  Liquidator

[(2000) 7 SCC 291] and Allahabad Bank v. Canara Bank and another [(2000) 4 SCC

406], and pleaded that being a Central legislation, the DRT Act would prevail over

the Kerala Act by which first charge was created in favour of the State.  The learned

Single Judge of the Kerala High Court negatived the bank’s challenge by observing

that  proceedings  under  the  Kerala  Act  had  been  initiated  before  the  issue  of

certificate by the Tribunal and that even if the Tribunal has got exclusive jurisdiction

to recover the amount due to the bank, the Tehsildar was not obliged to approach it

for recovery of the State dues.  The learned Single Judge referred to Section 46 of the

Kerala Revenue Recovery Act, 1968, which provides that within 14 days from the

date of attachment of any  immovable property any person other than the defaulter

can lodge objection to the attachment of the whole or any portion of such property on

the ground that such property was not liable for the arrears of public revenue, and

held that as the bank had claimed first  charge or prior charge over the attached

property, it can file appropriate objections under Section 46 of the Kerala Revenue

Recovery Act, 1968 and make a prayer that public revenue can be recovered after

paying its dues.  The learned Single Judge further observed that in terms of Section

47 of the Kerala Revenue Recovery Act, 1968 the petitioner can obtain release of the

attached property by paying arrears of the public revenue.  The appeal preferred

against the order of the learned Single Judge was dismissed by the Division Bench

which held that the bank can avail remedy by filing objections under Sections 46 to

48 of the Kerala Revenue Recovery Act, 1968.   

5. C.A.  No.2811/2006  –  The  Thane  Janata  Sahakari  Bank  Ltd.  vs.  The

Commissioner of Sales Tax & others – Appellant - Thane Janata Sahakari Bank Ltd.,

which  is  a  scheduled  cooperative  society  incorporated  under  the  Maharashtra

Cooperative Society Act, 1960 granted credit facilities to M/s. Charishma Cosmetics

Pvt. Ltd. Co. (for short ‘the Company’).  As on 30.6.2004, the company had availed

credit facility to the tune of Rs.2,32,00,000/-  by creating equitable  mortgage of  its

factory, land and building in favour of the bank.  Due to the company’s failure to

repay the amount, its account was classified as non-performing asset and the bank

initiated proceedings under the Securitisation Act by issuing notice under Section 13

(2).  The possession of movable and immovable properties of the company is said to

have been taken by the bank on 15.2.2005 and the same were sold  for a sum of

Rs.66,31,001/-. On 11.7.2005, Assistant Commissioner of Sales Tax informed the bank

that sales tax dues amounting to Rs.3,62,82,768/- constitute first charge against the

company and, therefore, it could not have taken possession of the mortgaged assets

and sold the same.   After some correspondence, the Assistant Commissioner issued

notice dated 16.8.2005 to the bank to show cause as to why action may not be taken

against  it  under  Section  39  of  the  Bombay  Sales  Tax  Act,  1959  (for  short  “the

Bombay Act”) for recovery of Rs.49,68,614/- in addition to the auction proceeds.  The

bank unsuccessfully contested the notice and then filed writ petition for quashing the

same.  It was urged on behalf of the bank that in view of the conflict between Section

38C of the Bombay Act and Section 35 of the Securitisation Act, the latter being a

Central legislation, the first charge created by the State Act cannot have priority over

debts of the bank because while enacting the Securitisation Act the Parliament will be

deemed to be aware of the provisions of the State legislation.  It was also contended

that  under  Section  169  of  Maharashtra  Land  Revenue  Code,  1966,  the  State

Government can claim priority over unsecured dues, but being secured creditor, the

bank  has  first  and  exclusive  charge  over  the  properties  of  the  company and  has

priority over the sales tax dues of the State.  The Division Bench of the High Court

analysed the provisions of the Securitisation Act, the State Act and observed:-  

“………  if any Central Act provides for first charge, the charge created  under  Section  38C  of  Bombay  Sales  Tax  Act  is overridden.  Conversely, if the Central Act does not provide for first charge in respect of the liability under the said Act, the first charge created under Section 38C of Bombay Sales Tax Act shall hold the field.”

The Division Bench then noted that Section 13 of the Securitisation Act  does not

create first charge in favour of the banks; that it merely provides the machinery for

realization by a secured creditor of the security interest without intervention of the

Court or Tribunal; that it overrides the provisions contained in Sections 69 or 69A of

the  Transfer  of  Property  Act which  empower the mortgagee to sell  or  concur in

selling  the  mortgaged property  or  any part  thereof  in  default  of  payment  of  the

mortgage money without intervention of the Court in the circumstances referred to in

Section 69 and for payment of Court Receiver as provided in Section 69A and held:

“The Bombay Sales Tax Act and the Securitisation Act have been enacted by the competent legislatures for different purposes and operate in different fields.  The Bombay Sales Tax Act is enacted by the State Legislature under Entry 54 of List II in the Seventh Schedule for levy of tax on the sale or purchase of certain goods in the State of Bombay (now State of Maharashtra).  On the other hand, the Securitisation Act has been enacted by the Parliament under  Entry  54  of  List  I  for  regulating  the  Securitisation  and reconstruction of financial assets and for enforcement of security interest.   There  is  neither  any  conflict  in  these  two  Acts  nor Section  38  C  of  the  Bombay  Sales  Tax  Act  can  be  said  to  be inconsistent with Section 35 of the Securitisation Act.  The area of operation  is  entirely  different  and  there  is  no  overlapping anywhere.

Section 35 of the Securitisation Act may have had some bearing, if there was some provision in the Securitisation Act for first charge in  favour  of  the  banks  and  financial  institutions.   But  neither Section 13 nor any other provision under the Securitisation Act makes a provision for first charge.

There being no provision in the Securitisation Act providing for first charge in favour of the banks section 35 of the Securitisation Act cannot be held to override section 38C of the Bombay Sales Tax Act, 1959 that specifically provides that the liability under the said  Act  shall  be  the  first  charge.   The  overriding  provision contained in Section 38C is only subject to the provision of the first charge in the Central Act holding the field.  The case of the Bank is not covered by the expression, “subject to any provision regarding first charge in any Central Act for the time being in force” and that being the position, Section 38C is not overridden by section 35 of the Securitisation Act.”

6. S/Shri Shekhar Naphde, Dushyant Dave, Bishwajeet Bhattacharya, T.L.V.

Iyer and Ms.  Indu Malhotra,  learned senior  counsel  appearing for the appellants

argued  that  as  the  DRT  Act  and  Securitisation  Act  have  been  enacted  by  the

Parliament under Article 246(1) read with Entry 45 in List I in the Seventh Schedule

of the Constitution for speedy recovery of debts due to banks or financial institutions

or for enforcement of security interest by the secured creditors and overriding effect

has  been  given  to  these  legislations  vis-a-vis other  laws,  the  provisions  contained

therein  will  have primacy over  State  legislations  which  have  been enacted  under

Article 246(2) read with Entry 54 in List II in the Seventh Schedule and under which

first charge has been created in favour of the State in respect of the dues of sales tax

etc.   Shri  Dushyant  Dave  relied  upon  the  judgments  in  State  of  West  Bengal  v.

Kesoram Industries Ltd. and others [(2004) 10 SCC 201] and Govt. of A.P. and anr.

v.   J.B.  Educational  Society  and  anr.  [(2005)  3  SCC 212],  and  argued  that  even

though the Central and State legislations have not been enacted with reference to a

particular entry in List III in the Seventh Schedule, Article 254 will get attracted, and

the Kerala and Bombay High Courts committed an error by refusing to accept the

submission that banks, financial institutions and secured creditors have priority in

the matter of recovery of debts or enforcement of security interest vis-à-vis the State’s

right to recover the dues of sales tax etc. Shri Bishwajeet Bhattacharya submitted

that in view of Article 254(1) of the Constitution, provisions contained in State laws

which  are  repugnant  to or  inconsistent  with  Central  legislations,  are  liable  to  be

ignored.   All  the learned counsel  laid  considerable  emphasis  on the  non obstante

clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation

Act, and argued that even though the language of Section 38C of the Bombay Act and

Section  26B  of  the  Kerala  Act  suggests  that  State  legislations  have  been  given

overriding effect vis a vis other laws, the courts are duty bound to give full effect to

the primacy of Central legislations over State legislations.  Shri Shekhar Naphde and

other learned counsel heavily relied on Section 13(1), (7) and (9) of the Securitisation

Act and argued that when Parliament has designedly given priority to the right of

banks  etc.  to  recover  their  dues  or  enforce  security  interest,  first  charge created

under the State legislation must be treated sub-servient to such right.  Learned senior

counsel made a pointed reference to the provisos incorporated in Section 13(9) for

giving priority to the dues of the workers of the company in liquidation and argued

that in the absence of similar provision in relation to sales tax dues etc. payable to the

State, priority given to the dues of banks etc. cannot be diluted or stultified by giving

over  stretched  interpretation  to  the  provisions  contained  in  the  State  legislations

relating to first charge.

7. Shri  Rakesh  Dwivedi  and  Shri  S.K.  Dholakia,  learned  senior  counsel

appearing for the States of Kerala and Maharashtra respectively argued that even

though the DRT Act and Securitisation Act contain  non obstante clauses suggesting

that the provisions contained therein would prevail over other laws, the same must be

interpreted keeping in view the legislative policy underlying those enactments and if

they are so interpreted, Section 38C of the Bombay Act and Section 26B of the Kerala

Act and similar provisions contained in other State legislations by which first charge

has been created on the property of the dealer or any other person liable to pay sales

tax  etc.  cannot  be  treated  inconsistent  with  Central  legislations.   Shri  Dwivedi

submitted that the DRT Act and Securitisation Act have been enacted to speed up the

recovery of the dues of banks, financial institutions and secured creditors but there is

no provision in the two enactments by which first charge has been created in favour

of banks, etc. and, therefore, the provisions contained in State legislations creating

first charge in respect of the dues of sales tax etc. cannot be treated as inconsistent

with Central legislations.  Shri Dwivedi further submitted that levy and collection of

tax etc. is sovereign function as well as necessity of the State and as such the State has

exclusive  plenary  power  to  legislate  on  that  subject  and  in  the  absence  of  any

provision in the DRT Act or Securitisation Act creating first charge in favour of the

banks etc., in lieu of their dues, these legislations cannot be given overriding effect

qua the provisions contained in the State legislations and right of the State to recover

the dues of sales tax etc. cannot be frustrated merely because a bank or financial

institution or secured creditor has initiated action for recovery of debt etc. by filing

application  under  Section  19  of  the  DRT  Act  or  by  resorting  to  the  procedure

contained  in  Section  13  of  the  Securitisation  Act.   In  support  of  this  argument,

learned senior counsel invoked the doctrine of sub silentio.

8. We have considered the respective arguments/submissions.  Article 245 of

the  Constitution  is  the  source  of  legislative  power  of  Parliament  and  State

legislatures.  It provides that subject to the provisions of the Constitution, Parliament

may make laws for the whole or any part of the territory of India, and the legislature

of a State may make laws for the whole or any part of the State.  The legislative field

of the Parliament and State legislatures has been specified in Article 246.   In terms of

Clause (1) of Article 246, Parliament has exclusive power to make laws with respect

to any of the matters enumerated in List I in the Seventh Schedule.  Under Clause (2)

the Parliament and subject to Clause (1), the legislature of any State also have power

to make laws with respect to any of the matters enumerated in List III in the Seventh

Schedule.  Subject to Clauses (1) and (2), the legislature of State has exclusive power

to make laws for such State or any part thereof with respect to any of the matters

enumerated in List II in the Seventh Schedule.  It is thus evident that Parliament has

exclusive power to legislate with respect to any of the matters enumerated in List I

and  State  legislatures  enjoys  similar  power  with  respect  to  any  of  the  matters

enumerated in List II.  The combined effect of the different clauses of Article 246 is

that in respect of any matter falling within List I, Parliament has exclusive power of

legislation, whereas the State legislature has exclusive power to make laws for such

State or any part thereof with respect to any of the matters enumerated in List II in

the Seventh Schedule and with respect to the matters enumerated in List III, both the

Parliament  and  State  legislature  have  power  to  make  laws.   Article  254  which

contains mechanism for resolution of conflict between Central and State legislations

enacted with respect to any matter enumerated in List III of the Seventh Schedule

reads as under:

“254. Inconsistency between laws made by Parliament and laws made by the Legislatures of States.-- (1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void. (2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List  contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been  reserved  for  the  consideration  of  the  President  and  has received his assent, prevail in that State: Provided  that  nothing  in  this  clause  shall  prevent  Parliament from enacting at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the Legislature of the State.”

9. Article  254  was  interpreted  by  the  Constitution  Bench  in  Zaverbhai

Amaidas v. State of Bombay [(1955) SCR 799] in the context of challenge to Bombay

Act No. 36/1947 on the ground that the same is  repugnant to Section 7(1)  of  the

Essential Supplies (Temporary Powers) Act, 1946.  The Constitution Bench referred

to the judgment in The Attorney General of Ontario v. The Attorney General for the

Dominion  [1896  A.C.  348]  and  held  “now  by  the  proviso  to  Article  254(2)  the

Constitution  has  enlarged  the  powers  of  Parliament,  and  under  that  proviso,

Parliament can do what the Central legislature could not under Section 107(2) of the

Government of India Act and enact a law adding to, amending, varying, repealing a

law of the State, when it relates to a matter mentioned in the Concurrent List.  The

proposition then is  that  under the  Constitution  Parliament can,  acting  under  the

proviso to Article 254(2), repeal a State law.  But when it does not expressly do so,

even then the State law will be void under that provision if it conflicts with a later

“law” with respect to the same matter”, that may be enacted by  Parliament.  In A.S.

Krishna  v.  State  of  Madras  [(1957)  SCR 399]  the  Constitution  Bench  considered

challenge to validity of Madras Prohibition Act, 1937 on the ground that the same is

repugnant to the Indian Evidence Act, 1872 and the Code of Criminal Procedure,

1898 which were enacted by the Parliament.  The Constitution Bench repelled the

challenge and held:

“The position, then, might thus be summed up: When a law is impugned on the ground that it is ultra vires the powers of the legislature which enacted it, what has to be ascertained is the true character of the legislation. To do that, one must have regard to the enactment as a whole, to its objects and to the scope and effect of  its  provisions.  If  on  such  examination  it  is  found  that  the legislation  is  in  substance  one  on  a  matter  assigned  to  the legislature, then it must be held to be valid in its entirety, even though it might incidentally trench on matters which are beyond its competence. It would be quite an erroneous approach to the question to view such a statute not as an organic whole, but as a mere collection of sections, then disintegrate it into parts, examine under what heads of legislation those parts would severally fall, and by that  process  determine what  portions  thereof  are intra vires, and what are not. Now, the Madras Prohibition Act is, as already stated, both in form and in substance, a law relating to intoxicating  liquors.  The  presumptions  in  Section  4(2)  are  not presumptions which are to be raised in the trial of all  criminal cases, as are those enacted in the Evidence Act. They are to be raised only in the trial of offences under Section 4(1) of the Act. They  are  therefore  purely  ancillary  to  the  exercise  of  the legislative  power in respect  of  Entry 31 in  List  II.  So also,  the provisions relating to search, seizure and arrest in Sections 28 to 32 are only with reference to offences committed or suspected to have  been  committed  under  the  Act.  They  have  no  operation generally  or to offences  which fall  outside the Act.  Neither the presumptions  in  Section  4(2)  nor  the  provisions  contained  in Sections 28 to 32 have any operation apart from offences created by  the  Act,  and  must,  in  our  opinion,  be  held  to  be  wholly ancillary to the legislation under Entry 31 in List II. The Madras Prohibition Act is thus in its entirety a law within the exclusive competence  of  the  Provincial  Legislature,  and  the  question  of repugnancy under Section 107(1) does not arise.”

10. In M/s. Hoechst Pharmaceuticals Ltd. and others v. State of Bihar and

others [(1983) 4 SCC 45], this Court considered the question whether there is any

conflict  between Drugs  (Price Control)  Order,  1979 made under Section  3 of  the

Essential Commodities Act, 1955 which is a Central legislation and Section 5(3) of the

Bihar Finance Act, 1981 by which surcharge was levied on certain dealers engaged in

selling drugs.  While negating challenge to the State legislation, a three-Judge Bench

laid down the following principles:

(1) The various entries in the three lists are not “powers” of legislation but “fields” of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing  power  and  the  Constitution  gives  independent  sources  of taxation to the Union and the States.

(2) In  spite  of  the  fields  of  legislation  having  been demarcated,  the  question  of  repugnancy  between  law made  by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and  a  direct  conflict  is  seen.  If  there  is  a  repugnancy  due  to overlapping found between List II on the one hand and List I and List III on the other, the State law will  be ultra vires and shall have to give way to the Union law.

(3)  Taxation is  considered to be a distinct  matter for purposes of legislative  competence.  There  is  a  distinction  made  between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The  power  to  tax  cannot  be deduced from a general legislative entry as an ancillary power.

(4)  The  entries  in  the  lists  being  merely  topics  or  fields  of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because, to quote V. Ramaswami, J., the allocation of the subjects to the lists is not by way  of  scientific  or logical  definition but  by  way of  a  mere simplex numeration of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall  also include within its expanse the legislations touching incidental and ancillary matters.

(5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative

competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or  III.  If  it  does,  no  further  question  need  be  asked  and Parliament’s legislative competence must be upheld. Where there are three lists containing a large number of entries, there is bound to  be  some  overlapping  among  them.  In  such  a  situation  the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence. The court has to look at the substance  of  the  matter.  The  doctrine  of  pith  and substance  is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main  objects  and  to  the  scope  and  effect  of  its  provisions. Incidental and superficial encroachments are to be disregarded.

(6)  The  doctrine  of  occupied field  applies  only when  there is  a clash  between  the  Union  and  the  State  Lists  within  an  area common to both. There the doctrine of pith and substance is to be applied and if the impugned legislation substantially falls within the power expressly conferred upon the legislature which enacted it,  an  incidental  encroaching  in  the  field  assigned  to  another legislature is to be ignored. While reading the three lists, List I has priority over Lists III and II and List III has priority over List II. However,  still,  the  predominance  of  the  Union  List  would  not prevent the State Legislature from dealing with any matter within List II though it may incidentally affect any item in List I.   

[Emphasis supplied]

11. The three-Judge Bench also dealt with the scope of Article 254 and held:

“Article 254 of the Constitution makes provision first, as to what would happen in the case of conflict between a Central and State law with  regard to  the  subjects  enumerated in  the  Concurrent List,  and  secondly,  for  resolving  such  conflict.  Article  254(1) enunciates the normal rule that in the event of a conflict between a Union and a State law in the concurrent field, the former prevails over the latter. Clause (1) lays down that if a State law relating to a concurrent subject is ‘repugnant’ to a Union law relating to that subject, then, whether the Union law is prior or later in time, the Union law will  prevail  and the State law shall,  to the extent of such repugnancy, be void. To the general rule laid down in clause (1),  clause  (2)  engrafts  an  exception  viz.  that  if  the  President assents  to  a  State  law  which  has  been  reserved  for  his consideration, it will prevail notwithstanding its repugnancy to an earlier  law of  the  Union,  both  laws  dealing  with  a  concurrent subject. In such a case, the Central Act, will give way to the State Act only to the extent of inconsistency between the two, and no more. In short, the result of obtaining the assent of the President

to a  State Act which is  inconsistent with  a previous  Union law relating to a concurrent subject would be that the State Act will prevail  in that State and override the provisions of the Central Act in their applicability to that State only. The predominance of the State law may however be taken away if Parliament legislates under  the  proviso  to  clause  (2).  The  proviso  to  Article  254(2) empowers the Union Parliament to repeal or amend a repugnant State law, either directly, or by itself enacting a law repugnant to the State law with respect to the ‘same matter’. Even though the subsequent law made by Parliament does not expressly repeal a State law, even then, the State law will become void as soon as the subsequent  law  of  Parliament  creating  repugnancy  is  made.  A State law would  be  repugnant  to the Union  law when  there  is direct conflict between the two laws. Such repugnancy may also arise  where  both  laws  operate  in  the  same  field  and  the  two cannot possibly stand together.”

12. In State of West Bengal v. Kesoram Industries Ltd. (supra), the majority

of  the Constitution Bench recognized the possibility  of  overlapping of  legislations

enacted  under  different  entries  in  Lists  I  and  II  in  the  Seventh  Schedule  and

observed:

“While reading the three lists, List I has priority over Lists III and II  and  List  III  has  priority  over  List  II.   However,  still,  the predominance  of  the  Union  List  would  not  prevent  the  State Legislature from dealing with any matter within List II though it may incidentally affect any item in List I.

In spite  of  the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in List III  and a direct conflict is seen.  If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State law will be ultra vires and shall have to give way to the Union law.

…. If there is conflict, the correct approach is to find an answer to three questions step by step as under:

One—Is it still possible to effect reconciliation between two entries so as to avoid conflict and overlapping?

Two—In which entry the impugned legislation falls,  by finding out the pith and substance of the legislation.  In this regard the court has to look at the substance of the matter.  The doctrine of pith and substance is sometimes expressed in terms of ascertaining the  true  character  of  legislation.   The  name  given  by  the

legislature to the legislation is immaterial.  Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions.  Incidental and superficial encroachments are to be disregarded.  Interpretation is the exclusive privilege of the Constitutional Courts and the court embarking upon the task of interpretation would place such meaning on the words as would effectuate  the  purpose  of  legislation  avoiding  absurdity, unreasonableness, incongruity and conflict.  As is with the words used  so  is  with  the  language  employed  in  drafting  a  piece  of legislation.  That interpretation would be preferred which would avoid conflict between two fields of legislation and would rather import homogeneity.   It  follows  as a corollary of the abovesaid statement that  while  interpreting  tax  laws  the  courts  would  be guided by the gist  of  the legislation instead of  by the apparent meaning  of  the  words  used  and  the  language  employed.   The courts shall have regard to the object and the scheme of the tax law under  consideration  and the  purpose  for  which  the cess  is levied, collected and intended to be used.  The courts shall make endeavour  to  search  where  the  impact  of  the  cess  falls.   The subject-matter of levy is not to be confused with the method and manner of assessment or realization.

and

Three – Having determined the field of legislation where in the impugned legislation falls  by applying the doctrine  of  pith  and substance,  can  an  incidental  trenching  upon  another  field  of legislation be ignored?  Once it is so determined if the impugned legislation substantially falls within the power expressly conferred upon the legislature which enacted it, an incidental encroaching in/trenching on the field assigned to another legislature is to be ignored.”

13. In Govt. of A.P. and anr. v.  J.B. Educational Society and anr. (supra), the

Court  was  called  upon  to  decide  whether  there  was  any  conflict  between  the

provisions  of  All  India  Council  for  Technical  Education  Act,  1987  and  the  A.P.

Education Act, 1982 and whether the State legislation was liable to be declared void

and inoperative on the ground that the State legislature was not competent to enact

law in the field occupied by the Central legislation.  A two-Judge Bench analysed the

provisions of the two enactments and held:

“Parliament has exclusive power to legislate with respect to any of the  matters  enumerated  in  List  I,  notwithstanding  anything contained in clauses (2) and (3) of Article 246. The non obstante clause  under  Article  246(1)  indicates  the  predominance  or supremacy of the law made by the Union Legislature in the event of  an overlap of  the law made by Parliament with  respect to  a

matter  enumerated  in  List  I  and  a  law  made  by  the  State Legislature with respect to a matter enumerated in List II of the Seventh Schedule.

……………………….

With respect to matters enumerated in List III (Concurrent List), both Parliament and the State Legislature have equal competence to legislate. Here again, the courts are charged with the duty of interpreting  the  enactments  of  Parliament  and  the  State Legislature in such manner as to avoid a conflict. If the conflict becomes  unavoidable,  then  Article  245 indicates  the  manner  of resolution of such a conflict.

Thus,  the  question  of  repugnancy  between  the  parliamentary legislation and the State legislation can arise in two ways.  First, where the legislations, though enacted with respect to matters in their allotted sphere, overlap and conflict. Second, where the two legislations are with respect to matters in the Concurrent List and there is a conflict. In both the situations, parliamentary legislation will predominate, in the first, by virtue of the non obstante clause in Article 246(1), in the second, by reason of Article 254(1). Clause (2) of Article 254 deals with a situation where the State legislation having  been  reserved  and  having  obtained  President’s  assent, prevails  in  that  State;  this  again  is  subject  to  the  proviso  that Parliament  can  again  bring  a  legislation  to  override  even  such State legislation.”

14. The ratio of the above noted judgments is that Article 254 gets attracted

only  when  both  Central  and  State  legislations  have  been  enacted  on  any  of  the

matters enumerated in List III in Seventh Schedule and there is  conflict between two

legislations.   Though in State of  West  Bengal  v.  Kesoram Industries  Ltd.  (supra)

some  observations  appear  to  have  been  made  suggesting  that  Article  254  gets

attracted even though legislations may have been enacted in different entries in Lists

I and II, but the same have to be read in consonance with the plain language of the

said Article and other judgments including the three-Judge Bench judgment in M/s.

Hoechst Pharmaceuticals Ltd. and others v. State of Bihar and others (supra), which

has been expressly approved by the Constitution Bench.

15. Undisputedly, the DRT Act and Securitisation Act have been enacted by

Parliament under Entry 45 in List I in the Seventh Schedule whereas Bombay and

Kerala Acts have been enacted by the concerned State legislatures under Entry 54 in

List II in the Seventh Schedule.  To put it differently, two sets of legislations have

been  enacted  with  reference  to  entries  in  different  lists  in  the  Seventh  Schedule.

Therefore, Article 254 cannot be invoked per se for striking down State legislations

on the ground that the same are in conflict with the Central legislations.  That apart,

as  will  be  seen  hereafter,  there  is  no  ostensible  overlapping  between  two  sets  of

legislations.  Therefore,  even if  the  observations  contained  in  Kesoram Industries’

case (supra) are treated as law declared under Article 141 of the Constitution, the

State legislations cannot be struck down on the ground that the same are in conflict

with Central legislations.   

16. Before proceeding further we may notice the background in which  the

DRT and Securitisation Acts were enacted, and schemes of the two legislations. After

independence,  the  Government of  India  decided  to give  impetus  to the  industrial

development of the country.  Central and State Governments encouraged banks and

other financial institutions to liberalize the grant of loans and other credit facilities to

the  industrial  entrepreneurs.  With  the  nationalization  of  banks,  this  policy  got  a

boost  and  the  country  witnessed  rapid  industrialization.   The  issue  of

repayment/recovery of loans etc. given by banks and financial  institutions did not

pose any serious problem in first three decades. However, with the passage of time,

the  human greed took over  the  righteousness  and those  who  were  granted  loans

and/or other financial facilities did not bother to repay.  Not only this, the efforts

made by banks and financial institutions for recovery of their dues were stultified by

the defaulting borrowers who indulged in unwarranted and protracted litigation in

civil courts.  The slow and tardy progress of cases instituted in civil courts resulted in

blocking of several thousand crores of public money, which was considered critical to

the  successful  implementation  of  fiscal  reform.   The  pioneers  of  financial  sector

reforms called  for  early  solution of  this  problem.  Therefore,  the Government  of

India constituted a committee under the Chairmanship of Shri T. Tiwari to examine

the  legal  and  other  difficulties  faced  by  banks  and  financial  institutions  in  the

recovery of their dues and suggest remedial measures.  The Tiwari Committee noted

that the existing procedure for recovery was very cumbersome and suggested that

special tribunals be set up for recovery of the dues of banks and financial institutions

by following a summary procedure.  The Tiwari Committee also prepared a draft of

the proposed legislation which contained a provision for disposal of cases in three

months and conferment of power upon the recovery officer for expeditious execution

of  orders  made by  adjudicating  bodies.   The  issue  was  further  examined  by the

Committee on the Financial  System headed by Shri  M. Narasimham.  In its  first

report, Narasimham Committee also suggested setting up of special tribunals with

special powers for adjudication of cases involving the dues of banks and financial

institutions.   Even in regard to priority among creditors,  Narasimham Committee

made the following suggestion:

“The Adjudication Officer will have such power to distribute the sale proceeds to the banks and financial institutions being secured creditors,  in  accordance  with  inter  se  agreement/arrangement between  them  and  to  the  other  persons entitled  thereto  in accordance with the priorities in the law.”

17. After considering the reports of two Committees and taking cognizance of

the fact that as on 30th September, 1990 more than 15 lakhs cases filed by public

sector banks and 304 cases filed by financial  institutions were pending in various

courts  for  recovery  of  debts  etc.  amounting  to  Rs.6,000  crores,  the  Central

Government  introduced  “The  Recovery  of  Debts  Due  to  Banks  and  Financial

Institutions Bill, 1993” in Lok Sabha on 13.5.1993.  It, however, appears that before

the Bill  could be passed,  Lok Sabha was  adjourned.   Therefore,  the President  of

India  in  exercise  of  the  powers  conferred  by  Article  123(1)  of  the  Constitution,

promulgated  “The  Recovery  of  Debts  Due  to  Banks  and  Financial  Institutions

Ordinance,  1993”,  which  was  replaced  by  the  DRT  Act.   The  new  legislation

facilitated  creation  of  specialized  forums,  i.e.,  the  Debts  Recovery  Tribunals  and

Debts Recovery Appellate Tribunals for expeditious adjudication of disputes relating

to recovery of the debts due to banks and financial institutions.  Simultaneously, the

jurisdiction of the civil courts was barred and all pending matters were transferred

to  the  Tribunals  from the  date  of  their  establishment.   For  some years,  the  new

dispensation  of  adjudication  worked  well.   However,  with  the  passage  of  time,

proceedings before the Debts Recovery Tribunals also started getting bogged down

due to invoking of technicalities by the borrowers.   Faced with this  situation,  the

Government  again  asked  the  Narasimham  Committee  to  suggest  measures  for

expediting recovery of debts etc. due to banks and financial institutions.  In its 2nd

Report, Narasimham Committee observed that the non-performing assets of most of

the  public  sector  banks  were  abnormally  high  and  the  existing  mechanism  for

recovery of the same was wholly insufficient.   In Chapter VIII of  the report,  the

Committee observed that the evaluation of legal frame work has not kept pace with

the changing commercial practice and financial sector reforms and as a result of this

the economy has not been able to reap full benefits of the reform process. By way of

illustration, the Committee referred to the scheme of mortgage under the Transfer of

Property Act and suggested that the existing laws should be changed not only for

facilitating speedy recovery of the dues of banks etc. but also for quick resolution of

disputes arising out of the action taken for recovery of such dues.   Andhyarujina

Committee  constituted  by the  Central  Government  for  examining  banking  sector

reforms also considered the need for changes in the legal system. Both Narasimham

and  Andhyarujina  Committees  suggested  enactment  of  new  legislation  for

securitisation and empowering the banks and financial institutions to take possession

of the securities and sell them without intervention of the court.   In the backdrop of

these recommendations, the Parliament enacted the Securitisation Act.   

Scheme of the DRT Act and Rules made thereunder

18. Section 2(g) of the DRT Act (as it stood before being amended by Act No.

30/2004) defined “debt” as – “any liability (inclusive of interest) which is alleged as

due from any person by a bank or a financial institution or by a consortium of banks

or financial  institutions during the course of  any business  activity undertaken by

bank or financial institution  or the consortium under any law for the time being in

force, in cash or otherwise, whether secured or unsecured, or whether payable under

a  decree  or  order  of  any  civil  court  or  otherwise  and  subsisting  on,  and  legally

recoverable on, the date of the application.”  After the amendment of 2004, “debt”

means “any liability (inclusive of interest) which is alleged as due from any person by

a bank or a financial institution or by a consortium of banks or financial institutions

during the course of any business activity undertaken by the bank or the financial

institution  or the consortium under any law for the time being in force, in cash or

otherwise, whether secured or unsecured, or assigned, or whether payable under a

decree or order of any civil court or any arbitration award or otherwise or under a

mortgage and subsisting on, and legally recoverable on, the date of the application.”

The provisions contained in Chapter II envisage establishment of the Debts Recovery

Tribunals and the Debts Recovery Appellate Tribunals, qualifications of Presiding

Officers and Members, term of their office, staff of the tribunals, salaries, allowances,

etc.  Section 17(1) of the DRT Act declares that a Tribunal shall have the jurisdiction,

powers  and  authority  to  entertain  and  decide  applications  made  by  banks  and

financial  institutions for recovery of  debts due to them.  Under Section 17(2), the

Appellate  Tribunal  has  been  vested  with  jurisdiction,  powers  and  authority  to

entertain  appeal  against  any  order  made  or  deemed  to  have  been  made  by  a

Tribunal.   Section 18 expressly  bars  the jurisdiction,  powers and authority of  all

courts except  the Supreme Court  and a High Court  exercising jurisdiction  under

Articles 226 and 227 of the Constitution of India in relation to matters specified in

Section 17.   Section 19, which finds place in Chapter IV of the DRT Act contains

procedure required to be followed by the Tribunal for deciding an application made

for recovery of debt.  It envisages making of application by a bank or a financial

institution  for  recovery  of  any  debt  from  any  person,  issue  of  summons  to  the

defendant  to  show  cause  as  to  why  relief  prayed  for  may not  be  granted  to  the

applicant  and also provides  for passing of  appropriate orders.   By amending Act

No.30/2004, three provisos were inserted in Section 19(1).  In terms of first proviso, a

bank or a financial institution can, after obtaining permission of the DRT, withdraw

the original application for the purpose of taking action under the Securitisation Act.

Second proviso lays down that an application for withdrawal filed under first proviso

must be disposed of within 30 days.  The third proviso requires recording of reasons

in case the Tribunal refuses permission or leave for withdrawal of application under

Section 19(1).  Section 19(6) provides for the defendant's claim to set-off against the

bank's  demand  for  a  certain  sum  of  money.    Section  19(8)  gives  right  to  the

defendant to set up a counter claim.   Section 19(12) empowers the Tribunal to make

an interim order by way of injunction, stay or attachment before judgment debarring

the defendant from transferring, alienating or otherwise dealing with, or disposing

of,  his  properties and assets.  Under Section 19(13),  the Tribunal  is  empowered to

direct the defendant  to furnish security where it  is  satisfied  that the defendant  is

likely to dispose of the property or cause damage to the property in order to defeat

the decree which may ultimately be passed in favour of bank or financial institution.

Section 19(18), empowers the Tribunal to appoint a receiver of any property on the

ground of equity.  This can be done before or after grant of certificate for recovery of

debt.  Under Section 19(19), a recovery certificate issued against a company can be

enforced  by  the  Tribunal  which  can  order  the  property  to  be  sold  and  the  sale

proceeds distributed amongst the secured creditors in accordance with the provisions

of Section 529A of the Companies Act, 1956 and pay the balance/surplus, if any, to

the debtor-company.  Section 20(1) lays down that any person aggrieved by an order

made, or deemed to have been made, by a Tribunal  may prefer an appeal to the

Appellate Tribunal.  Sub-section (2) of Section 20 declares that no appeal  shall  lie

from an order made by the Tribunal with the consent of the parties.  Sub-section (3)

prescribes the period of limitation i.e. 45 days.  Proviso to this sub-section empowers

the Tribunal to entertain an appeal after the expiry of 45 days if it is satisfied that

there was sufficient cause for not filing the appeal within the prescribed period.  Sub-

sections (4) to (6) contain the procedure to be followed by the Appellate Tribunal for

disposal of an appeal.  Section 21 lays down that the Appellate Tribunal shall  not

entertain an appeal unless the person preferring appeal deposits 75 per cent of the

amount determined by the Tribunal under Section 19.   Section 22 lays down that the

Tribunal and the Appellate Tribunal shall not be bound by the procedure contained

in the Code of Civil Procedure, but shall be guided by the principles of natural justice

and subject to the other provisions of the Act or rules made thereunder, the Tribunal

and the Appellate Tribunal shall be free to regulate their own procedure.  Section 25

specifies three modes of recovery of debt, namely, (a) attachment and sale, (b) arrest

of  the  defendant  and  (c)  appointment  of  a  receiver  for  the  management  of  the

properties of  the defendant.   Other modes of recovery are specified  in Section 28

which states that where a certificate has been issued by the Tribunal under Section

19(7), the Recovery Officer may, without prejudice to the modes of recovery specified

in Section 25, recover the amount of debt by any one or more of the modes mentioned

in Section 28.  By Section 29, the provisions of Second and Third Schedules to the

Income Tax Act, 1961 and the Income Tax (Certificate Proceedings) Rules, 1962 have

been made applicable to the recovery proceedings.  Section 31(1) states that every suit

or  other  proceeding  pending  before  any  court  immediately  before  the  date  of

establishment of a Tribunal,  shall  stand transferred to the Tribunal if the subject

matter thereof would have been within its jurisdiction had the cause of action arisen

after establishment of the Tribunal.  Section 31A lays down that where a decree or

order was passed by any court before the commencement of the Recovery of Debts

Due to Banks and Financial Institutions (Amendment) Act, 2000 and the same had

not been executed, then the decree-holder can apply to the Tribunal for recovery of

the amount. Sub-section (1) of Section 34 contains a non obstante clause and declares

that save as otherwise provided in sub-section (2), provisions of the DRT 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  that  Act.   Amended  sub-section  (2)  of  Section  34  lays  down  that  the

provisions of the DRT Act or rules made thereunder shall be in addition to and not in

derogation  of  Industrial  Finance  Corporation  Act,  1948,  The  State  Financial

Corporation Act, 1951, The Unit Trust of India Act, 1963, Industrial Reconstruction

Bank of India Act, 1984 and the Small Industries Development Bank of India Act,

1989.   

19. In exercise of the power conferred upon it under Section 36 of the DRT

Act, the Central Government has framed the Debts Recovery Tribunal (Procedure)

Rules,  1993.   These  rules  regulate  the  procedure  for  filing  application  in  the

prescribed  form,  scrutiny  thereof,  fee  for  application,  contents  of  application,

documents  to  be  filed  with  the  application,  filing  of  reply and documents  by  the

respondent, date and place of hearing of the application, the manner of recording the

order,  publication  of  order  and  communication  thereof  to  the  parties.   By  an

amendment made in 1997, Rule 5A was added to enable a party to apply for review

of the order made by the Tribunal on the ground of some mistake or error apparent

on the face of the record.  For regulating the procedure of the Appellate Tribunal, the

Central Government has framed the Debts Recovery Appellate Tribunal (Procedure)

Rules, 1994.  The provisions contained in these rules are similar to those contained in

the rules regulating the procedure of the Tribunal.

Scheme of the Securitisation Act and Rules made thereunder

20. Section  2(b)  defines  "asset  reconstruction"  to  mean acquisition  by  any

Securitisation company or reconstruction company of any right or interest of any

bank or financial institution in any financial assistance for the purpose of realisation

of such financial assistance. Section 2(f) defines the word "borrower" to mean, any

person who has been granted financial assistance by any bank or financial institution

or who has given any guarantee or created any mortgage or pledge as security for the

financial  assistance  granted  by  any  bank  or  financial  institution.    It  includes  a

person  who  becomes  borrower  of  a  securitisation  company  or  reconstruction

company consequent upon acquisition by it of any right or interest of any bank or

financial institution in relation to such financial assistance.  Section 2(ha) declares

that “debt” shall have the meaning assigned to it in clause (g) of Section 2 of the DRT

Act.  Section 2(k) defines "financial assistance" to mean any loan or advance or any

debentures  or  bonds  subscribed  or  any  guarantees  given  or  letters  of  credit

established or any other credit facility extended by any bank or financial institution.

Section 2(l) defines "financial asset" to mean any debt or receivables and includes a

claim to any debt or receivables or part thereof, whether secured or unsecured or any

debt or receivables secured by, mortgage of, or charge on, immovable property, or a

mortgage,  charge,  hypothecation  or  pledge  of  movable  property  or  any  right  or

interest in the security, whether full or part underlying such debt or receivables or

any beneficial interest in property, whether movable or immovable, or in such debt,

receivables,  whether  such  interest  is  existing,  future,  accruing,  conditional  or

contingent or any financial assistance.   Section 2(n) defines “hypothecation” to mean

a charge created by a borrower in favour of  a  secured creditor as a security for

financial assistance. Section 2(o) defines “non-performing asset” to mean an asset or

account of a borrower which has been classified by a bank or financial institution as

sub-standard, doubtful or loss asset.   Section  2(z) defines “Securitisation” to mean

acquisition  of  financial  assets  by  any  securitisation  company  or  reconstruction

company  from any originator  whether  by  raising  of  funds  by  such  securitisation

company or reconstruction company from qualified institutional buyers by issue of

security receipts representing undivided interest in such financial assets or otherwise.

Section 2(zc) defines “secured asset” to mean the property on which security interest

is created. Section  2(zd) defines “secured creditor” to mean any bank or financial

institution or any consortium or group of banks or financial institutions and includes

(i)  debenture  trustee  appointed  by  any  bank  or  financial  institutions,  or  (ii)

securitisation  company  or  reconstruction  company,  whether  acting  as  such  or

managing a trust set up by such securitization company or reconstruction company

for the securitisation or reconstruction, as the case may be, or (iii) any other trustee

holding  securities  on  behalf  of  a  bank  or  financial  institution,  in  whose  favour

security  interest  is  created  for  due  repayment  by  any  borrower  of  any  financial

assistance. Section 2(ze) defines a “secured debt” to mean a debt which is secured by

any security interest.  Section 2(zf) defines “security interest” to mean right, title and

interest  of  any kind whatsoever  upon property,  created in  favour of  any secured

creditor  and  includes  any  mortgage,  charge,  hypothecation  and  assignment.”

 Chapter  II  which  contains  Sections  3  to  12  deals  with  regulation  of

securitisation  and  reconstruction  of  financial  assets  of  banks  and  financial

institutions.  Chapter III deals with enforcement of security interest.  It comprises of

seven sections including  Section  13 which  is  crucial  for decision of  these appeals.

Sub-section  (1)  of  Section  13  contains  a  non  obstante clause.   It  lays  down  that

notwithstanding  anything  contained  in  Sections  69  or  69A  of  the  Transfer  of

Property Act, any security interest created in favour of any secured creditor may be

enforced,  without  the  intervention of  the  Court  or  Tribunal,  by  such creditor  in

accordance  with  the  provisions  of  this  Act.      Sub-section  (2)  of  Section  13

enumerates  first  of  many  steps  needed  to  be  taken  by  the  secured  creditor  for

enforcement of security interest.  This sub-section provides that if a borrower, who is

under a liability to a secured creditor, makes any default in repayment of secured

debt and his account in respect of such debt is classified as non-performing asset,

then the secured creditor may require the borrower by notice in writing to discharge

his liabilities within sixty days from the date of the notice with an indication that if he

fails to do so, the secured creditor shall be entitled to exercise all or any of its rights

in terms of Section 13(4).  Sub-section (3) of Section 13 lays down that notice issued

under Section 13(2) shall contain details of the amount payable by the borrower as

also the details of the secured assets intended to be enforced by bank or financial

institution.  Sub-section (3-A) of Section 13 lays down that the borrower may make a

representation in response to the notice issued under Section 13(2) and challenge the

classification of his account as non-performing asset as also the quantum of amount

specified in the notice.  If the bank or financial institution comes to the conclusion

that the representation/objection of the borrower is not acceptable, then reasons for

non acceptance are required to be communicated within one week.  Sub-section (4) of

Section 13 specifies various modes which can be adopted by the secured creditor for

recovery of secured debt.  The secured creditor can take possession of the secured

assets of the borrower and transfer the same by way of lease, assignment or sale for

realizing the secured assets.  This is subject to the condition that the right to transfer

by way of lease etc. shall be exercised only where substantial part of the business of

the borrower is held as secured debt.  If the management of whole or part of the

business is severable, then the secured creditor can take over management only of

such business of the borrower which is relatable to security.  The secured creditor

can appoint any person to manage the secured asset, the possession of which has been

taken over.  The secured creditor can also, by notice in writing, call upon a person

who has acquired any of the secured assets from the borrower to pay the money,

which may be sufficient to discharge the liability of the borrower.  Sub-section (7) of

Section 13 lays down that where any action has been taken against a borrower under

sub-section  (4),  all  costs,  charges  and  expenses  properly  incurred  by  the  secured

creditor or any expenses incidental thereto can be recovered from the borrower.  The

money which is received by the secured creditor is required to be held by him in trust

and applied, in the first instance, for such costs, charges and expenses and then in

discharge of dues of the secured creditor.  Residue of the money is payable to the

person entitled thereto according to his rights and interest.  Sub-section (8) imposes a

restriction on the sale or transfer of the secured asset if the amount due to the secured

creditor together with costs, charges and expenses incurred by him are tendered at

any time before the time fixed for such sale or transfer.  Sub-section (9) deals with the

situation in which more than one secured creditor has stakes in the secured assets

and lays down that in the case of financing a financial asset by more than one secured

creditor or joint financing of a financial  asset by secured creditors,  no individual

secured creditor shall be entitled to exercise any or all of the rights under sub-section

(4) unless all of them agree for such a course.  There are five unnumbered provisos to

Section 13(9)  which  deal  with  pari  passu charge  of  the workers  of  a  company in

liquidation.  The first of these provisos lays down that in the case of a company in

liquidation, the amount realized from the sale of secured assets shall be distributed in

accordance with the provisions of Section 529A of the Companies Act, 1956.  The

second proviso deals with the case of a company being wound up on or after the

commencement of this Act.  If the secured creditor of such company opts to realize its

security instead of relinquishing the same and proving its debt under Section 529(1)

of the Companies Act, then it can retain sale proceeds after depositing the workmen’s

dues with the liquidator in accordance with Section 529A.  The third proviso requires

the liquidator to inform the secured creditor about the dues payable to the workmen

in terms of Section 529A.  If the amount payable to the workmen is not certain, then

the liquidator has to intimate the estimated amount to the secured creditor.   The

fourth proviso lays  down that in case the secured creditor deposits  the estimated

amount of the workmen’s dues, then such creditor shall be liable to pay the balance

of the workmen’s dues or entitled to receive the excess amount, if any, deposited with

the liquidator.  In terms of fifth proviso, the secured creditor is required to give an

undertaking to the liquidator to pay the balance of the workmen’s dues, if any.  Sub-

section (10) lays down that where dues of the secured creditor are not fully satisfied

by the sale proceeds of the secured assets, the secured creditor may file an application

before  the  Tribunal  under  Section  17  for  recovery  of  balance  amount  from  the

borrower.  Sub-section (11) states that without prejudice to the rights conferred on

the secured creditor under or by this section, it shall be entitled to proceed against

the guarantors or sell the pledged assets without resorting to the measures specified

in clauses (a) to (d) of sub-section (4) in relation to the secured assets.  Sub-section

(12) lays down that rights available to the secured creditor under the Act may be

exercised by one or more of its officers authorised in this behalf.  Sub-section (13)

lays down that after receipt of notice under sub-section (2), the borrower shall not

transfer by way of sale, lease or otherwise (other than in the ordinary course of his

business) any of  his secured assets referred to in the notice without prior written

consent  of  the  secured  creditor.   Section  14  represents  semblance  of  court’s

intervention by way of assistance to a secured creditor in taking possession of the

secured asset.   The  secured creditor can,  for the  purpose  of  taking  possession  or

control of any secured asset, request in writing to the Chief Metropolitan Magistrate

or  the  District  Magistrate  within  whose  jurisdiction  the  secured  asset  or  other

document relating thereto is situated or found to take possession thereof.  If  such

request is made, the Chief Metropolitan Magistrate or the District Magistrate, as the

case may be, is obliged to take possession of such asset and document and forward

the same to the secured creditor.  Section 17 speaks of the remedies available to any

person  including  borrower  who  may  feel  aggrieved  by  the  action  taken  by  the

secured creditor under sub-section (4) of Section 13.  Such an aggrieved person can

make an application to the Tribunal within 45 days from the date on which action is

taken under that sub-section.  By way of abundant caution, an explanation has been

added to Section 17(1) and it has been clarified that the communication of reasons to

the  borrower  in  terms of  Section  13(3A)  shall  not  constitute  a  ground  for  filing

application under Section 17(1).  Sub-section (2) of Section 17 casts a duty on the

Tribunal  to  consider  whether  the  measures  taken  by  the  secured  creditor  for

enforcement of security interest are in accordance with the provisions of the Act and

rules made thereunder.  If the Tribunal, after examining the facts and circumstances

of the case and evidence produced by the parties, comes to the conclusion that the

measures taken by the secured creditor are not in consonance with sub-section (4) of

Section  13,  then  it  can direct  the  secured  creditor  to  restore  management  of  the

business or possession of the secured assets to the borrower.  On the other hand, if

the Tribunal finds that the recourse taken by the secured creditor under sub-section

(4) of Section 13 is in accordance with the provisions of the Act and the rules made

thereunder, then, notwithstanding anything contained in any other law for the time

being in force, the secured creditor can take recourse to one or more of the measures

specified in Section 13(4) for recovery of its secured debt.  Sub-section (5) of Section

17 prescribes the time limit of sixty days within which an application made under

Section  17  is  required  to  be  disposed  of.   Proviso  to  this  sub-section  envisages

extension  of  time,  but  the  outer  limit  for  adjudication  of  an  application  is  four

months.  If the Tribunal fails to decide the application within a maximum period of

four  months,  then  either  party  can  move  the  Appellate  Tribunal  for  issue  of  a

direction  to  the  Tribunal  to  dispose  of  the  application  expeditiously.   Section  18

provides for an appeal to the Appellate Tribunal.  Section 34 lays down that no civil

court shall  have jurisdiction to entertain any suit  or proceeding in respect of any

matter  which  a  Tribunal  or  Appellate  Tribunal  is  empowered  to  determine.   It

further lays down that no injunction shall be granted by any court or other authority

in respect of any action taken or to be taken under the Securitisation Act or DRT Act.

Section 35 of the Securitisation Act is substantially similar to Section 34(1) of the

DRT Act.  It declares that the provisions of this Act shall have effect notwithstanding

anything inconsistent therewith contained in any other law for the time being in force

or any instrument having  effect  by virtue of  any such law.   Section 37,  which  is

similar to Section 34(2) of the DRT Act lays down that the provisions of this Act or

the Rules  made thereunder shall  be in  addition  to,  and not in  derogation of,  the

Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the Securities

and Exchange Board of India Act, 1992, the Recovery of Debts Due to Banks and

Financial Institutions Act, 1993 or any other law for the time being in force.   

21. In exercise of powers vested in it under Sections 38(1) and (2)(b) read with

Sections  13(4),  (10)  and  (12)  of  the  Securitisation  Act,  the  Central  Government

framed the Security Interest (Enforcement) Rules, 2002.  Rule 3 prescribes the mode

of service of demand notice.  Rule 4 details the procedure to be followed after issue of

demand notice.  Various sub-rules of  

this  rule  specify  the  mode of  taking  possession  of  moveable  security  assets,  their

preservation and protection, valuation and sale.  Rule 8 lays down similar procedure

in respect of immovable security assets.  Rule 9 regulates time of sale, issue of sale

certificate  and  delivery  of  possession  to  the  purchaser.   Rule  10  provides  for

appointment of manager of the security assets of which possession has been taken

over by the secured creditor.  Rule 11 regulates procedure for recovery of shortfall of

secured debt.

22. An analysis of the above noted provisions makes it clear that the primary

object  of  the  DRT Act  was  to  facilitate  creation of  special  machinery for  speedy

recovery of the dues of banks and financial institutions.  This is the reason why the

DRT  Act  not  only  provides  for  establishment  of  the  Tribunals  and  Appellate

Tribunals with the jurisdiction, powers and authority to make summary adjudication

of applications made by banks or financial  institutions and specifies the modes of

recovery of the amount determined by the Tribunal or Appellate Tribunal but also

bars  the jurisdiction of  all  courts except  the Supreme Court  and High Courts  in

relation  to  the  matters  specified  in  Section  17.   The  Tribunals  and  Appellate

Tribunals have also been freed from the shackles of procedure contained in the Code

of Civil Procedure.  To put it differently, the DRT Act has not only brought into

existence special procedural mechanism for speedy recovery of the dues of banks and

financial institutions, but also made provision for ensuring that defaulting borrowers

are not able to invoke the jurisdiction of civil courts for frustrating the proceedings

initiated by the banks and financial institutions.   

23. The enactment of the Securitisation Act can be treated as one of the most

radical  legislative  measures  taken  by  the  Government  for  ensuring  that  dues  of

secured  creditors  including  banks,  financial  institutions  are  recovered  from  the

defaulting  borrowers  without  any  obstruction.   For  the  first  time,  the  secured

creditors have been empowered to take measures for recovery of their dues without

the intervention of the Courts or Tribunals.  The Securitisation Act has also brought

into existence a new dispensation  for registration and regulation of securitisation

companies or reconstruction companies, facilitating securitisation of financial assets

of  banks  and  financial  institutions,  easy  transferability  of  financial  assets  by  the

securitisation  company  or  reconstruction  company  to  acquire  financial  assets  of

banks and financial institutions by issue of debentures or bonds or any other security

in  the  nature  of  debenture,  empowering  the  securitisation  companies  or

reconstruction  companies  to  raise  funds  by  issue  of  security  receipts  to  qualified

institutional  buyers,  facilitating  reconstruction  of  financial  assets  acquired  by

exercising power of enforcement of securities or change of management, declaration

of  any  securitisation  company  or  reconstruction  company  as  a  public  financial

institution for the purpose of Section 4A of the Companies Act, defining `security

interest’  as  any  type  of  security  including  mortgage  and  charge  on  immovable

properties given for due payment of any financial assistance given by any bank or

financial institution, classification of borrowers account as non-performing asset and

above all empowering banks and financial institutions to take possession of securities

given for financial assistance and sale or lease the same or take over management.   

24. In  the  light  of  the  above,  we  shall  now  consider  whether  there  is  any

conflict between the DRT Act and Securitisation Act on one hand and the Bombay

and Kerala Acts and similar State legislations on the other, and whether by virtue of

non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the

Securitisation Act, the provisions contained in those legislations override Section 38C

of the Bombay Act, Section 26B of the Kerala Act and similar other State legislations.

For reference sake, these provisions are reproduced below:

DRT Act

“34.  Act  to  have  over-riding  effect.—(1)  Save  as  otherwise provided in sub-section (2), the provisions of this 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.

(2) The  provisions  of  this  Act  or  the  rules  made thereunder shall be in addition to, and not in derogation of, the

Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of  India Act,  1984 (62 of  1984),  the Sick Industrial  Companies (Special  Provisions)  Act,  1985  and  the  Small  Industries Development Bank of India Act, 1989.”

Securitisation Act

“35.  The  provisions  of  this  Act  to  override  other  laws.-The provisions of this Act shall have effect, notwithstanding anything inconsistent  therewith  contained  in  any  other  law for  the  time being in force or any instrument having effect by virtue of any such law.”

37. Application of other laws not barred.--The provisions of this Act or the rules made thereunder shall be in addition to, and not in  derogation  of,  the  Companies  Act,  1956  (1  of  1956),  the Securities  Contracts  (Regulation)  Act,  1956  (42  of  1956),  the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of  Debts Due to Banks and Financial  Institutions Act,  1993  (51  of  1993)  or  any other  law for  the  time being  in force.”

Bombay Sales Tax Act, 1959

“38C.  Liability  Under  this  Act  to  be  First  Charge- Notwithstanding  anything  contained  in  any  contract  to  the contrary but  subject to any provision regarding first  charge in any Central Act for the time being in force, any amount of tax, penalty,  interest or any other sum, payable by a dealer or any other  person  under  this  Act  shall  be  the  first  charge  on  the property of the dealer, or, as the case may be, person.”

Kerala General Sales Tax Act, 1963

“26B.  Tax  payable  to  be  first  charge  on  the  property.-- Notwithstanding anything to the contrary contained in any other law  for  the  time  being  in  force,  any  amount  of  tax,  penalty, interest and any other amount, if any, payable by a dealer or any another person under this  Act,  shall  be the first  charge on the property of the dealer, or such person.”

Section 14A of the Workmen’s Compensation Act, 1923, Section 11 of the Employees’

Provident Funds and Miscellaneous Provisions Act, 1952 (for short ‘the EPF Act’),

Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals

(Development and Regulation) Act, 1957, Section 30 of the Gift Tax Act, 1958 and

Section 529A of  the Companies  Act,  1956 are some of  the Central  legislations by

which statutory first charge has been created in favour of the State or workers, read

as under:-

Workmen’s Compensation Act, 1923 “14A.  Compensation to be first charge on assets transferred by employer.–  Where an employer transfers his assets before any amount due in respect of any compensation, the liability wherefor accrued  before  the  date  of  the  transfer,  has  been  paid,  such amount  shall,  notwithstanding  anything  contained in  any  other law for the time being in force, be a first charge on that part of the assets so transferred as consists of immovable property.”

Employees’  Provident Funds  and  Miscellaneous  Provisions  Act, 1952

“11. Priority of payment of contributions over other debts.– (1)  Where  any  employer  is  adjudicated  insolvent  or,  being  a company, an order for winding up is made, the amount due– (a) from the  employer in  relation to an  establishment  to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or, as the case may be, the Insurance  Fund,  damages  recoverable  under  section  14B, accumulations required to be transferred under sub-section (2) of section  15  or  any  charges  payable  by  him  under  any  other provision of  this  Act  or of  any provision of  the Scheme or  the Insurance Scheme; or (b) from  the  employer  in  relation  to  an  exempted establishment in report of any contribution to the provident fund or any insurance fund in so far it relates to exempted employees, under the rules of the provident fund or any insurance fund, any contribution  payable  by  him towards  the  Pension  Fund  under sub-section (6) of section 17, damages recoverable under section 14B  or  any  charges  payable  by  him  to  the  appropriate Government under any provision of this Act or under any of the conditions specified under section 17, shall, where the liability therefor has accrued before the order of adjudication or winding up is  made,  be  deemed to be included among the debts which under section 49 of the Presidency-towns Insolvency  Act,  1909  (3  of  1909),  or  under  section  61  of  the Provincial Insolvency Act, 1920 (5 of 1920), or under section 530 of the Companies Act, 1956 (1 of 1956) are to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up, as the case may be. Explanation. – In this  sub-section and in section 17,  “insurance fund”  means  any  fund  established  by  an  employer  under  any scheme for providing benefits  in the nature of life  insurance to employees, whether linked to their deposits in provident fund or not,  without  payment  by  the  employees  of  any  separate contribution or premium in that behalf.

11(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer, whether in respect of the employee’s contribution deducted from the wages of the employee or the employer’s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law, for the time being in force, be paid in priority to all other debts.”

Estate Duty Act, 1953 “74(1). Estate duty a first charge on property liable thereto.–  (1) Subject to the provisions of section 19, the estate duty payable in respect of property, movable or immovable, passing on the death of the deceased, shall be a first charge on the immovable property so passing (including agricultural land) in whomsoever it may vest on his death after the debts and encumbrances allowable under Part VI of this Act; and any private transfer or delivery of such property shall be void against any claim in respect of such estate duty.”

Mines and Minerals (Development and Regulation) Act, 1957 “25(2).   Any rent,  royalty,  tax, fee or other sum due to the Government either under this Act or any rule made thereunder or under  the  terms  and  conditions  of  any  reconnaissance  permit, prospecting licence or mining lease may, on a certificate of such officer as may be specified by the State Government in this behalf by general or special order, be recovered in the same manner as if it  were  an  arrear  of  land  revenue  and  every  such  sum which becomes due to the Government after the commencement of the Mines and Minerals (Regulation and Development) Amendment Act, 1972, together with the interest due thereon shall be a first charge on the assets of the holder of the reconnaissance permit, prospecting licence or mining lease, as the case may be.”

Gift-Tax Act (18 of 1958)

“30. Gift-tax to be charged on property gifted. – Gift-tax payable in respect of any gift comprising immovable property shall be a first charge on that property but any such charge shall not affect the  title  of  a  bona  fide purchaser  for  valuable  consideration without notice of the charge.”

Companies Act, 1956:

“529A.  Overriding  preferential  payments.--   Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company –

(a) workmen's dues; and

(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues,  

shall be paid in priority to all other debts.   (2) the debts  payable  under  clause  (a)  and clause  (b)  of sub-section  (1)  shall  be  paid  in  full,  unless  the  assets  are insufficient to meet them, in which case they shall abate in equal proportions.”

Section 46B of the State Financial Corporations Act, 1951 (for short ‘the SFC Act’)

which contains a non obstante clause similar to the one contained in Section 34(1) of

the DRT Act and Section 35 of the Securitisation Act and the effect of which was

considered by a Division Bench of the Kerala High Court vis a vis Section 11(2) of the

EPF Act also read as under:-

State Financial Corporations Act, 1951

“46B.  Effect of Act on other laws.-   The provisions of this Act and of any rules or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or articles  of  association  of  an  industrial  concern or in  any other instrument having effect by virtue of any law other than this Act, but  save  as  aforesaid,  the  provisions  of  this  Act  shall  be  in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern.”

25. As a prelude to the consideration of question relating to conflict between

Central  and  State  legislations  and  priority,  if  any,  given  to  the  dues  of  banks,

financial  institutions  and  other  secured  creditors  under  the  DRT  Act  and

Securitisation Act, it will be useful to notice some rules of interpretation of statutes,

one of which is the rule of contextual interpretation.  This rule requires that the court

should examine every word of a statute in its context.  In doing so, the Court has to

keep in view preamble of the statute, other provisions thereof, pari materia statutes, if

any, and the mischief intended to be remedied.  Context often provides the key to the

meaning  of  the  word  and  the  sense  it  carries.   Its  setting  gives  colour  to  it  and

provides a cue to the intention of the legislature in using it.  In his famous work on

Statutory Interpretation, Justice G.P. Singh has quoted Professor H.A. Smith in the

following words:

“‘No word’, says Professor H.A. Smith ‘has an absolute meaning, for  no words  can be  defined in vacuo,  or  without  reference to some context’. According to Sutherland there is a ‘basic fallacy’ in saying  ‘that  words  have  meaning  in  and  of  themselves’,  and ‘reference  to  the  abstract  meaning  of  words’,  states  Craies,  ‘if there be any such thing, is of little value in interpreting statutes’. … in determining the meaning of any word or phrase in a statute the  first  question  to  be  asked  is  —  ‘What  is  the  natural  or ordinary  meaning  of  that  word  or  phrase  in  its  context  in  the statute? It is only when that meaning leads to some result which cannot reasonably be supposed to have been the intention of the legislature,  that  it  is  proper  to  look  for  some  other  possible meaning of the word or phrase.’ The context, as already seen in the  construction  of  statutes,  means  the  statute  as  a  whole,  the previous  state  of  the  law,  other  statutes  in  pari  materia,  the general scope of the statute and the mischief that it was intended to remedy.”

In Poppatlal Shah v. State of Madras [AIR 1953 SC 274], this Court while construing

the  word  ‘sale’  appearing  in  the  Madras  General  Sales  Tax  Act,  1939 before  its

amendment in 1947, observed: “it is a settled rule of construction that to ascertain the

legislative intent, all the constituent parts of a statutes are to be taken together, and

each word, phrase or sentence is to be considered in the light of the general purpose

of the Act itself”.  

26. In  Reserve  Bank  of  India  v.  Peerless  General  Finance  and  Investment

Company Limited [(1987) 1 SCC 424], it was observed, “that interpretation is best

which  makes  the  textual  interpretation  match the  contextual.”   Speaking  for  the

Court, Chinappa Reddy, J. noted the importance of rule of contextual interpretation

and held:-

“Interpretation must depend on the text and the context. They are the bases of  interpretation.  One may well  say if  the text is  the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual  interpretation  match  the  contextual.  A  statute  is  best interpreted  when  we  know  why  it  was  enacted.  With  this knowledge,  the statute must be read, first  as a whole  and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the  glasses  of  the  statute-maker,  provided  by  such  context,  its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the  reasons  for  it  that  the  Court  construed the expression ‘prize chit’ in Srinivasa [(1980) 4 SCC 507]  and we find no reason to depart from the Court’s construction.”    

27. In R. v. National Asylum Support Services [(2002) 4 All ER 654], LORD

STEYN  observed  “the  starting  point  is  that  language  in  all  legal  texts  conveys

meaning according to the circumstances in which it was used.  It follows that context

must  always  be  identified  and  considered  before  the  process  of  construction  or

during it.  It is, therefore, wrong to say that the court may only resort to the evidence

of contextual scene when an ambiguity has arisen.”

28. A  non  obstante clause  is  generally  incorporated  in  a  statute  to  give

overriding effect to a particular section or the statute as a whole.   While interpreting

non  obstante clause,  the  Court  is  required  to  find  out  the  extent  to  which  the

legislature intended to do so and the context in which the non obstante clause is used.

This rule of interpretation has been applied in several decisions.  In  State of West

Bengal v.  Union of India [(1964) 1 SCR 371], it was observed that the Court must

ascertain the intention of the legislature by directing its attention not merely to the

clauses to be construed but to the entire statute; it must compare the clause with the

other parts of the law and the setting in which the clause to be interpreted occurs.

29. In Madhav Rao Jivaji Rao Scindia v. Union of India and another [(1971) 1

SCC 85] Hidayatullah, C.J. observed that the non obstante clause is no doubt a very

potent clause intended to exclude every consideration arising from other provisions

of the same statute or other statute but “for that reason alone we must determine the

scope” of that provision strictly. When the section containing the said clause does not

refer  to  any  particular  provisions  which  it  intends  to  override  but  refers  to  the

provisions of the statute generally, it is not permissible to hold that it excludes the

whole Act and stands all alone by itself. A search has, therefore, to be made with a

view to determining which provision answers the description and which does not.

30. In R.S. Raghunath v. State of Karnataka and another [(1992) 1 SCC 335],

a three-Judge Bench referred to the earlier judgments in Aswini Kumar Ghose v.

Arabinda Bose [AIR 1952 SC 369], Dominion of India v. Shrinbai A. Irani [AIR 1954

SC 596], Union of India v. G.M. Kokil [1984 (Supp.) SCC 196], Chandavarkar Sita

Ratna Rao v. Ashalata S. Guram [(1986) 4 SCC 447] and observed:

“………The non-obstante clause is appended to a provision with a view to give the enacting part of the provision an overriding effect in  case  of  a  conflict.  But  the  non-obstante clause  need  not necessarily and always be co-extensive with the operative part so as  to  have  the  effect  of  cutting  down  the  clear  terms  of  an enactment and if the words of the enactment are clear and are capable  of  a  clear  interpretation  on  a  plain  and  grammatical construction  of  the  words  the  non-obstante clause  cannot  cut down the construction and restrict the scope of its operation. In such cases the non-obstante clause has to be read as clarifying the whole position and must be understood to have been incorporated in the enactment by the legislature by way of abundant caution and not by way of  limiting the ambit  and scope of  the Special Rules.”

31. In A.G. Varadarajulu v.  State of  Tamil  Nadu [(1998)  4  SCC 231],  this

Court  relied  on Aswini  Kumar Ghose’s  case.   The  Court  while  interpreting  non

obstante clause contained in Section 21-A of Tamil Nadu Land Reforms (Fixation of

Ceiling on Land) Act, 1961 held :-

“It is  well  settled that while  dealing with a  non obstante clause under which the legislature wants to give overriding effect to a section,  the court  must  try to find out  the extent  to  which  the legislature had intended to give one provision overriding  effect over another provision.  Such intention of the legislature in this behalf is to be gathered from the enacting part of the section. In Aswini  Kumar  Ghose v.  Arabinda  Bose Patanjali  Sastri,  J. observed: “The enacting part of a statute must, where it is clear, be taken to control  the  non  obstante  clause  where  both  cannot  be  read harmoniously;”

32. The DRT Act and Securitisation Act were enacted by Parliament in the

backdrop  of  recommendations  made  by  the  expert  committees  appointed  by  the

Central Government for examining the causes for enormous delay in the recovery of

dues of banks and financial institutions which were adversely affecting fiscal reforms.

The committees headed by Shri T. Tiwari and Shri M. Narasimham suggested that

the existing legal regime should be changed and special adjudicatory machinery be

created for ensuring speedy recovery of the dues of banks and financial institutions.

Narasimham  and  Andhyarujina  Committees  also  suggested  enactment  of  new

legislation for securitisation and empowering the banks etc. to take possession of the

securities and sell them without intervention of the Court.  The DRT Act facilitated

establishment of two-tier system of Tribunals.  The Tribunals established at the first

level  have  been  vested  with  the  jurisdiction,  powers  and  authority  to  summarily

adjudicate the claims of banks and financial institutions in the matter of recovery of

their  dues  without  being bogged  down  by  the  technicalities  of  the  Code  of  Civil

Procedure.  The Securitisation Act drastically changed the scenario inasmuch as it

enabled banks, financial institutions and other secured creditors to recover their dues

without intervention of the Courts or Tribunals.  The Securitisation Act also made

provision for registration and regulation of securitisation/reconstruction companies,

securitisation of financial assets of banks and financial institutions and other related

provisions.  However, what is most significant to be noted is that there is no provision

in either of  these enactments by which first  charge has been created in favour of

banks, financial institutions or secured creditors qua the property of the borrower.

Under Section 13(1) of the Securitisation Act, limited primacy has been given to the

right of a secured creditor to enforce security interest vis-à-vis Section 69 or Section

69A of the Transfer of Property Act.   In terms of that sub-section, secured creditor

can enforce security interest without intervention of the Court or Tribunal and if the

borrower has created any mortgage of the secured asset, the mortgagee or any person

acting on his behalf cannot sell the mortgaged property or appoint a receiver of the

income of the mortgaged property or any part thereof in a manner which may defeat

the right  of  the secured creditor to enforce  security interest.   This  provision  was

enacted in the backdrop of Chapter VIII of Narasimham Committee’s 2nd Report in

which specific reference was made to the provisions relating to mortgages under the

Transfer of Property Act.  In an apparent bid to overcome the likely difficulty faced

by  the  secured  creditor  which  may  include  a  bank  or  a  financial  institution,

Parliament incorporated the  non obstante clause in Section 13 and gave primacy to

the right of secured creditor  vis  a vis other mortgagees who could exercise rights

under Sections 69 or 69A of the Transfer of Property Act.  However, this primacy has

not  been  extended  to  other  provisions  like  Section  38C of  the  Bombay  Act  and

Section 26B of the Kerala Act by which first charge has been created in favour of the

State over the property of the dealer or any person liable to pay the dues of sales tax,

etc.  Sub-section (7) of Section 13 which envisages application of the money received

by the secured creditor by adopting any of the measures specified under sub-section

(4) merely regulates distribution of money received by the secured creditor.  It does

not create first charge in favour of the secured creditor.  By enacting various provisos

to  sub-section  (9),  the  legislature  has  ensured  that  priority  given  to  the  claim of

workers of a company in liquidation under Section 529A of the Companies Act, 1956

vis a vis secured creditors like banks is duly respected. This is the reason why first of

the  five  unnumbered  provisos  to  Section  13(9)  lays  down  that  in  the  case  of  a

company in liquidation, the amount realized from the sale of secured assets shall be

distributed in accordance with the provisions of Section 529A of the Companies Act,

1956.  This and other provisos do not create first charge in favour of the worker of a

company in liquidation for the first time but merely recognize the existing priority of

their claim under the Companies Act.  It is interesting to note that the provisos to

sub-section (9) of Section 13 do not deal with the companies which fall in the category

of borrower but which are not in liquidation or are not being wound up.  It is thus

clear that provisos referred to above are only part of the distribution mechanism

evolved by the legislature and are intended to protect and preserve the right of the

workers of a company in liquidation whose assets are subjected to the provisions of

the Securitisation Act and are disposed of by the secured creditor in accordance with

Section 13 thereof.   

33. The  non obstante clauses contained in Section 34(1) of the DRT Act and

Section 35 of the Securitisation Act give overriding effect to the provisions of those

Acts only if there is anything inconsistent contained in any other law or instrument

having effect by virtue of any other law.  In other words, if there is no provision in

the other enactments which are inconsistent with the DRT Act or Securitisation Act,

the provisions contained in those Acts cannot override other legislations.  Section 38C

of  the  Bombay Act and Section  26B of  the  Kerala Act  also  contain  non obstante

clauses and give statutory recognition to the priority of  State’s charge over other

debts,  which  was  recognized  by Indian  High Courts  even before  1950.   In  other

words, these sections and similar provisions contained in other State legislations not

only create first charge on the property of the dealer or any other person liable to pay

sales tax, etc. but also give them overriding effect over other laws.  In Builders Supply

Corporation v. Union of India [(1965) 2 SCR 289], the Constitution Bench considered

the question whether tax payable to the Union of India has priority over other debts.

After making a reference to the judgments of the Bombay High Court in Bank of

India v. John Bowman and Ors., [AIR 1955 Bom. 305], Madras High Court in Kaka

Mohammad Ghouse Sahib & Co. v. United Commercial Syndicate and others [(1963)

49 I.T.R.  25] and Manickam Chettiar v. Income-tax Officer, Madura, [(1938) 6 ITR

180], the Court held :

(i) “The Common Law doctrine of the priority of Crown debts had a wide sweep but the question in the present appeal was the narrow one whether the Union of India was entitled to claim that the recovery of the amount of tax due to it from a citizen must take precedence and priority over unsecured debts due from the said citizen to his other private creditors.  The weight of authority in India was strongly in support of the priority of tax dues.

(ii) The  Common  Law  doctrine  on  which  the  Union  of India  based its  claim in  the present  proceedings  had been applied  and upheld in that part of  India  which was known as `British India’ prior to the Constitution. The  rules  of  Common  Law  relating  to  substantive rights  which  had  been  adopted  by  this  country  and enforced by judicial decisions, amount to `law in force’ in the territory of India at the relevant time within the meaning of Art. 372(1).  In that view of the matter, the contention of the appellant that after the Constitution was  adopted  the  position  of  the  Union  of  India  in regard  to  its  claim  for  priority  in  the  present proceedings had been alerted could not be upheld.

(iii) The  basic  justification  for  the  claim  for  priority  of Government debts rests on the well-recognised principle that the State is entitled to raise money by taxation, otherwise it will not be able  to  function  as  a  sovereign  government  at  all.   This consideration emphasizes the necessity and wisdom of conceding to the State the right to claim priority in respect of its tax dues.”

34. In State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling

Corporation and others [(1995) 2 SCC 19], the Court again recognized the priority of

the State’s statutory first charge under Section    11-AAAA of the Rajasthan Sales

Tax Act, 1954 vis-à-vis claim of the bank to recover its dues from the borrower.   

35. In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and others [(2000)

5 SCC 694], the Court reviewed case law on the subject and observed:

“The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well-recognised principle  that  the  State  is  entitled  to  raise  money  by  taxation because unless adequate revenue is received by the State, it would not  be able to function as a  sovereign Government at all.  It  is essential that as a sovereign, the State should be able to discharge its  primary governmental  functions  and in  order to be able to discharge such functions  efficiently,  it  must be in  possession of necessary funds and this consideration emphasises the necessity and  the  wisdom  of  conceding  to  the  State,  the  right  to  claim priority in respect of its tax dues (see Builders Supply Corpn.). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority  over  private  debts  and  that  this  rule  of  common  law amounts to law in force in the territory of British India  at the relevant  time  within  the  meaning  of  Article  372(1)  of  the Constitution  of  India  and  therefore  continues  to  be  in  force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the State’s sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the  available  judicial  pronouncements  their  Lordships  have summed up the law as under:

1. There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts.

2. The  common  law  doctrine  about  priority  of  Crown debts which was recognised by Indian High Courts prior to 1950 constitutes  “law in force” within  the meaning of  Article  372(1) and continues to be in force.

3. The  basic  justification  for  the  claim  for  priority  of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues.

4. The doctrine may not apply in respect of debts due to

the  State  if  they  are  contracted  by  citizens  in  relation  to commercial activities which may be undertaken by the State for achieving socio-economic good. In other words, where the welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic government functions of the State and seeks to recover debts from its debtors arising out of such  commercial  activities  the  applicability  of  the  doctrine  of priority shall be open for consideration.”

36. In State of M.P. and another v. State Bank of Indore and others [(2002) 10

SCC 441], this Court considered whether statutory first charge created under Section

33-C of  the M.P. General Sales Tax Act, 1958 would prevail over the bank’s charge.

The facts of that case show that in 1974, respondent No.2 obtained a term loan from

State Bank of Indore and executed a promissory note and pledged certain machinery

to  the  bank  for  securing  repayment  of  loan.   Two  more  loans  were  taken  by

respondent no.2 in 1979.  The bank sued respondent No.2 for recovery of its dues.

During the pendency of the litigation, Section 33-C was inserted in the State Act.  The

State claimed first charge under Section 33-C upon the machinery of respondent No.2

in lieu of sales tax dues.  The trial Court and the High Court declined to accept the

State’s claim.  The High Court observed that the bank’s charge on the machinery was

prior to the insertion of Section 33-C in the State Act and the subsequent loans taken

in  1979  do  not  alter  the  position  in  favour  of  the  State.   The  High  Court  then

proceeded to hold that the charge created in favour of the bank remain valid and

operative till repayment of the loan.   This Court reversed the judgments of the trial

Court and High Court and held:

“Section 33-C creates a statutory first charge that prevails over any  charge  that  may  be  in  existence.  Therefore,  the  charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the Bank in respect of the loan taken by the second respondent. There is no question of retrospectivity here, as, on the date when it was introduced, Section 33-C operated in respect of all  charges  that  were  then  in  force  and  gave  sales  tax  dues precedence over them.”

37. Section 529A of the Companies Act and Section 11(2) of the EPF Act both

of  which  are  Central  legislations  also  contain  non  obstante clauses  give  statutory

recognition to the priority of workers dues over other debts.  In Allahabad Bank v.

Canara Bank and another (supra),  a  two-Judge Bench recognized the priority of

workers  dues  under  Section  529A  of  the  Companies  Act  over  other  debts.   In

Recovery  Officer,  Employees  Provident  Fund  v.  Kerala  Financial  Corporation

[(2002) 3 ILR  Kerala 4],  a Division Bench of Kerala High Court considered the

primacy of first charge created under Section 11(2) of the EPF Act vis-à-vis Section

46B of  the SFC Act.   The facts of  that  case were that  a  company by name M/s.

Darpan Electronics (P) Ltd. had taken loan from the Kerala Financial Corporation

and mortgaged its immovable property for securing repayment. During March 1990

and  December  1990,  the  company  defaulted  in  payment  of  contributions  to  the

Employees Provident Fund.  It also committed default in repayment of loan.  The

Kerala Financial Corporation sold the moveable assets of the company for a sum of

Rs.89,083/-.  The recovery officer appointed under the EPF Act made an application

for recovery of provident fund contribution.  He also attached 37 cents of land which

had  already  been  mortgaged  by  the  company  to  the  Financial  Corporation  and

prohibited the bank from transferring the amount of Rs.89,083/- lying in the account

of the company.  The Corporation challenged this action by filing writ petition under

Article 226 of the Constitution, which was allowed by the learned Single Judge.  The

Division Bench referred to Section 11(2) of the EPF Act and held that the workers

dues will have priority over other debts.  Speaking for the Bench, B.N. Srikrishna, CJ

(as he then was) observed as under:  

“Sub-section (2) of  section 11 of  the EPF and MP Act has  two facets.  First, it declares that the amount due from the employer towards contribution under the EPF and MP Act shall be deemed to be the first charge on the assets of the establishment.  Second, it also  declares  that  notwithstanding  anything  contained  in  any other law for the time being in force, such debt shall be paid in

priority to all  other debts.   Both these provisions  bring out the intention  of  the  Parliament  to  ensure  the  social  benefit  as contained in the legislation.  There are other provisions in the Act rendering  the  amounts  of  provident  fund  immune  from attachment  of  civil  court’s  decree,  which  also  indicate  such intention of Parliament.”

The  Division  Bench  then  considered  the  argument  based  on  Section  100  of  the

Transfer of Property Act and observed:

“With  regard  to  the  argument  based  on  section  100  of  the Transfer of Property Act, the matter is no longer res integra.  In State  Bank  of  Bikaner  and  Jaipur  v.  National  Iron  and  Steel Rolling Corporation and others, this question came up specifically for consideration of the Supreme Court and the answer given by the Supreme Court is unmistakably against the first respondent. That was a case where the State Bank of Bikaner claimed priority over sales tax arrears due to the State on the ground that it was a secured creditor.  Section 11 AAAA of the Rajasthan Sales Tax Act  declares  that any amount of  tax,  penalty,  interest  and any other sum, if any, payable by a dealer, or any other person under the Act, shall be the first charge on the property of the dealer, or such person.  On behalf of the State Bank of Bikaner, section 100 of the Transfer of Property Act was relied upon to contend that, since there was a mortgage in favour of the Bank, the Bank would have precedence over the claim of sales tax dues, which was only by way of a charge.  After analysis of section 100 of the Transfer of Property Act, and considering the distinction drawn between a mortgage  and  charge  as  discussed  in  the  earlier  decision  in Dattatreya Shanker Mote v. Anand Chintaman Datar, it was held that  the expression “transferee  of  property used in  section 100 refers to transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage.  It was further held that the charge created under section 11 AAAA of Rajasthan Sales Tax Act over the property of the dealer or a person liable to pay sales tax or other dues was created in respect of the entire interest in respect of the property, since the section declares the dues of the Sales Tax Department as a first charge, the first charge would operate over the entire title of the property which continue with the mortgagor.  Therefore, when a statutory first  charge is  created on the property of the dealer, the interest of the mortgage is not excluded from the first charge.   The  Supreme  Court  also  relied  on  Fisher  and Lightwood’s Law of Mortgage, 10th Edn. and the Judgment of the Appeal  Court  in  Westminister  City  Council  v.  Haymarket Publishing  Ltd.,  and  finally  concluded  that  since  the  statute created  a  first  charge,  it  clearly  gave  priority  to  the  statutory charge  over  all  other  charges  on  the  property  including  a mortgage.  The expression “first charge” was explained to mean

that,  it  would  cover  within  its  ambit  a  mortgage  also. Consequently,  when  a  first  charge  is  created  by  statute,  that charge will have precedence over an existing mortgage.”

The Division Bench negatived the argument that  non obstante clause contained in

Section 46B of the SFC Act will override Section 11(2) of the EPF Act by assigning

the following reasons:

“The contention of the first respondent based on the overriding effect of section 46 B of the S.F.C. Act has no substance in our judgment.  Undoubtedly, the intention of Parliament in enacting section 46 B in the year 1956 was to ensure that a State Financial Corporation  could  quickly  and  effectively  recover  the  amounts due by taking possession of the property of the defaulter instead of having resort to the cumbersome method of recovery  through a court of law.  While this was the law, Parliament amended section 11 of the E.P.F. and M.P. Act by specifically enacting sub-section (2) thereof, declaring that the amount due as contribution to the Employees Provident Fund has first charge on the assets of the establishment  and  that,  notwithstanding  anything  contained  in any  other  law  for  the  time  being  in  force,  it  shall  be  paid  in priority against all other debts.  In fact, the second facet of section 11(2) of the E.P.F. and M.P. Act goes one step further than what is provided  in section 46-B of  S.F.C. Act.   The  reason for this  is obvious.  While the State Financial Corporation would have to be helped to recover the debts due to it from a defaulting debtor, the Provident Fund payable to workers is of greater moment, since it is a matter of terminal social security benefit made available by statute to the working class.  Taking into consideration that E.P.F. and  M.P.  Act  is  a  social  benefit  legislation,  and  the  evil consequences  of  Provident  Fund  dues  being  defeated  by  prior claims  of  secured  or  unsecured  creditors,  the  Legislature  took care to declare that irrespective of when a debt is created, the dues under the E.P.F. and M.P. Act would always remain first charge and shall be paid first out of the assets of the establishment.  We are also not impressed by the contention of the first respondent that  upon  usage  of  non  obstante  clause  in  section  46  B  of  the S.F.C.  Act.   Sub-section  (2)  of  section  11  of  E.P.F.  Act  is  of subsequent date.  No doubt, both section 46 B of the S.F.C. Act and section 11(2) of the E.P.F. and M.P. Act declare their intent by usage of the non obstante clause.  But, since section 11(2) of the E.P.F. and M.P. Act has been enacted later, we must ascribe to the Parliament the intention to override the earlier legislation also.  It is, therefore, clear that section 11(2) of the E.P.F. and M.P. Act overrides all provisions of other enactments including section 46 B of the S.F.C. Act.”

38. While enacting the DRT Act and Securitisation Act, Parliament was aware

of the law laid down by this Court wherein priority of the State dues was recognized.

If Parliament intended to create first charge in favour of banks, financial institutions

or  other  secured  creditors  on  the  property  of  the  borrower,  then  it  would  have

incorporated a provision like Section 529A of the Companies Act or Section 11(2) of

the EPF Act and ensured that notwithstanding series of judicial  pronouncements,

dues of banks, financial institutions and other secured creditors should have priority

over the State’s statutory first charge in the matter of recovery of the dues of sales

tax,  etc.   However,  the  fact  of  the  matter  is  that  no  such  provision  has  been

incorporated  in  either  of  these  enactments  despite  conferment  of  extraordinary

power upon the secured creditors to take possession and dispose of the secured assets

without  the intervention of  the Court  or Tribunal.   The reason for this  omission

appears to be that the new legal regime envisages transfer of secured assets to private

companies.  The  definition  of  “secured  creditor”  includes

securitisation/reconstruction  company  and any other  trustee  holding  securities  on

behalf of bank/financial institution.  The definition of “securitisation company” and

“reconstruction company” in Section 2(v) and (za) shows that these companies may

be private companies registered under Companies Act, 1956 and having a certificate

of  registration  from  the  Reserve  Bank  under  Section  3  of  Securitisation  Act.

Evidently, Parliament did not intend to give priority to the dues of private creditors

over sovereign debt of the State.   

39. If the provisions of the DRT Act and Securitisation Act are interpreted

keeping in view the background and context in which these legislations were enacted

and the purpose sought to be achieved by their enactment, it becomes clear that the

two legislations, are intended to create a new dispensation for expeditious recovery of

dues of banks, financial institutions and secured creditors and adjudication of the

grievance made by any aggrieved person  qua the procedure adopted by the banks,

financial  institutions  and  other  secured  creditors,  but  the  provisions  contained

therein cannot be read as creating first charge in favour of banks, etc.  If Parliament

intended to give priority to the dues of banks, financial institutions and other secured

creditors over the first charge created under State legislations then provisions similar

to those contained in Section 14A of the Workmen’s Compensation Act, 1923, Section

11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the

Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift-

Tax Act, and Section 529A of the Companies Act, 1956 would have been incorporated

in the DRT Act and Securitisation Act.  Undisputedly,  the two enactments do not

contain provision similar to Workmen’s Compensation Act, etc. In the absence of any

specific provision to that effect, it is not possible to read any conflict or inconsistency

or overlapping between the provisions of the DRT Act and Securitisation Act on the

one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on

the other and the non obstante clauses contained in Section 34(1) of the DRT Act and

Section 35 of the Securitisation Act cannot be invoked for declaring that the first

charge  created  under  the  State  legislation  will  not  operate  qua or  affect  the

proceedings initiated by banks, financial institutions and other secured creditors for

recovery of their dues or enforcement of security interest, as the case may be.  The

Court could have given effect to the non obstante clauses contained in Section 34(1) of

the DRT Act and Section 35 of the Securitisation Act  vis a vis Section 38C of the

Bombay Act and Section 26B of the Kerala Act and similar other State legislations

only if there was a specific provision in the two enactments creating first charge in

favour of  the  banks,  financial  institutions  and other  secured creditors  but  as  the

Parliament has not made any such provision in either of the enactments, the first

charge created by the State legislations on the property of the dealer or any other

person, liable to pay sales tax etc., cannot be destroyed by implication or inference,

notwithstanding the fact that banks, etc. fall in the category of secured creditors.  In

this connection, reference may be made to the judgments in M.K. Ranganathan and

another v. Government of Madras and others [(1955) 2 SCR 374], State of Gujarat v.

Shyamlal  Mohanlal  Choksi  and  others  [AIR 1965  SC 1251]  and  Byram Pestonji

Gariwala  v.  Union  Bank  of  India  and  others  [(1992)  1  SCC  31].   In  M.K.

Ranganathan’s case, a three-Judge Bench of this Court interpreted the expression

“any sale held without leave of the Court of any of the properties” which were added

in Section 232(1) of the Indian Companies Act, 1913 by amending Act No. XXII of

1936  and  held  that  the  said  expression  refers  only  to  sales  held  through  the

intervention of the Court and not to sales effected by the secured creditor outside the

winding up and without the intervention of the Court.  While answering in negative

the  question  whether  amendment  was  intended  to  bring  within  the  sweep  of  the

general  words “sales effected by the secured creditor outside the winding up”,  in

negative, the Court referred to Maxwell on Interpretation of Statutes, the judgment

of  Privy  Council  in  P.  Murugian  v.  Jainudeen,  C.L.  [(1954)  3  W.L.R.  682]  and

observed:

"It is a legitimate rule of construction to construe words in an Act of  Parliament  with  reference  to  words  found  in  immediate connection  with  them.   It  is  also  well-recognized  rule  of construction  that  the  legislature  does  not  intend  to  make  a substantial alteration in the law beyond what it explicitly declares either  in  express  words  or  by  clear  implication  and  that  the general words of the Act are not to be so construed as to alter the previous  policy  of  the  law,  unless  no  sense  or  meaning  can  be applied  to  those  words  consistently  with  the  intention  of preserving the existing policy untouched.”

40. In  Shyamlal  Mohanlal  Choksi’s  case  (supra),  the  Constitution  Bench

considered whether Section 94 of  the Code of  Criminal Procedure,  1898 apply  to

accused person under trial and held that it does not.  The Court referred to Article 20

(3)  of  the  Constitution  which  declares  that  the  accused  cannot  be  compelled  to

incriminate himself and observed:

“The  Indian  Legislature  was  aware  of  the  above  fundamental canons of criminal  jurisprudence because in various sections of the Criminal Procedure Code it gives effect to it. For example, in Section 175 it is provided that every person summoned by a police officer in a proceeding under Section 174 shall be bound to attend and to answer truly all questions other than questions the answers to  which  would  have  a  tendency  to  expose  him  to  a  criminal charge or to a  penalty or forfeiture.  Section  343 provides  that except as provided in Sections 337 and 338, no influence by means of any promise or threat or otherwise shall be used to an accused person to induce him to disclose or withhold any matter within his knowledge. Again, when the accused is examined under Section 342, the accused does not render himself liable to punishment if he  refuses  to  answer  any  questions  put  to  him.  Further,  now although the accused is a competent witness, he cannot be called as a witness except on his own request in writing.  It  is further provided in Section 342-A that his failure to give evidence shall not be made the subject of any comment by any parties or the court  or  give  rise  to  any  presumption  against  himself  or  any person charged together with him at the same trial.

It seems to us that in view of this background the Legislature, if it were minded to make Section 94 applicable to an accused person, would have said so in specific words. It is true that the words of Section 94 are wide enough to include an accused person but it is well-recognised that in some cases a limitation may be put on the construction of the wide terms of a statute (vide Craies on Statute Law, p. 177). Again it is a rule as to the limitation of the meaning of general words used in a statute that they are to be, if possible, construed as not to alter the common law (vide Craies on Statute Law, p. 187).”

41. In  Byram  Pestonji  Gariwala’s  case  (supra),  the  Court  considered  the

question whether the amendment made in the Code of Civil Procedure in 1976 had

the effect of curtailing the authority of counsel to compromise the matter, referred to

some English decisions and observed:

“It is a rule of legal policy that law should be altered deliberately rather than casually. Legislature does not make radical changes in law  ‘by  a  sidewind,  but  only  by  measured  and  considered provisions’.  (Francis  Bennion’s  Statutory  Interpretation, Butterworths,  1984,  para  133).  As  stated  by  Lord  Devlin  in National Assistance Board v. Wilkinson: (QB p. 661) “It is a well established principle of construction that a statute is

not  to  be  taken  as  effecting  a  fundamental  alteration  in  the general law unless it uses words that point unmistakably to that conclusion.”

Statutes relating to remedies and procedure must receive a liberal construction  ‘especially  so  as  to  secure  a  more  effective,  a speedier, a simpler, and a less expensive administration of law’. See Crawford’s Statutory Construction, para 254. The object of the amendment  was  to  provide  an  appropriate  remedy  to  expedite proceedings  in  court.  That  object  must  be  borne  in  mind  by adopting a purposive construction of the amended provisions. The legislative intention being the speedy disposal of cases with a view to relieving the  litigants  and  the  courts  alike  of  the  burden  of mounting arrears, the word ‘parties’ must be so construed as to yield  a  beneficent  result,  so  as  to  eliminate  the  mischief  the legislature had in mind.

There  is  no  reason  to  assume  that  the  legislature intended to curtail  the implied authority of counsel,  engaged in the  thick  of  proceedings  in  court,  to  compromise  or  agree  on matters relating to the parties,  even if  such matters exceed the subject  matter of  the  suit.  The  relationship  of  counsel  and his party  or  the  recognised  agent  and  his  principal  is  a  matter  of contract;  and  with  the  freedom  of  contract  generally,  the legislature  does  not  interfere except  when warranted by  public policy, and the legislative intent is expressly made manifest. There is  no  such  declaration  of  policy  or  indication  of  intent  in  the present  case.  The  legislature  has  not  evinced  any  intention  to change  the  well  recognised  and  universally  acclaimed  common law tradition of an ever alert,  independent  and active bar with freedom to manoeuvre with force and drive for quick action in a battle  of  wits  typical  of  the  adversarial  system of  oral  hearing which  is  in  sharp contrast  to  the  inquisitorial  traditions  of  the ‘civil  law’  of  France  and  other  European  and Latin  American countries where written submissions have the pride of place and oral arguments are considered relatively insignificant. (See Rene David,  English  Law and French  Law — Tagore  Law Lectures, 1980). ‘The civil law’ is indeed equally efficacious and even older, but it is the product of a different tradition, culture and language; and  there  is  no  indication,  whatever,  that  Parliament  was addressing itself to the task of assimilating or incorporating the rules and practices of that system into our own system of judicial administration.

So  long  as  the  system  of  judicial  administration  in India  continues  unaltered,  and  so  long  as  Parliament  has  not evinced  an  intention  to  change  its  basic  character,  there  is  no reason to assume that Parliament has, though not expressly, but impliedly reduced counsel’s role or capacity to represent his client as effectively as in the past. On a matter of such vital importance, it is most unlikely that Parliament would have resorted to implied

legislative  alteration  of  counsel’s  capacity  or  status  or effectiveness.  In  this  respect,  the  words  of  Lord  Atkin  in Sourendra comparing the Indian advocate with the advocate in England, Scotland and Ireland, are significant: (AIR p. 161)

“There are no local conditions which make it less desirable for the client  to  have  the  full  benefit  of  an  advocate’s  experience  and judgment. One reason, indeed, for refusing to imply such a power would be a lack of confidence in the integrity or judgment of the Indian  advocate.  No  such  considerations  have  been  or  indeed could  be  advanced,  and  their  Lordships  mention  them  but  to dismiss them.”

42. We may now advert to the judgments of this Court in Allahabad Bank’s

case (supra), A.P. State Financial Corporation v. Official Liquidator (supra), ICICI

Bank Ltd. v. SIDCO Leathers Ltd. and others [(2006) 10 SCC 452], Transcore v.

Union of India and another [(2008) 1 SCC 125] on which reliance has been placed by

learned counsel for the appellants and also a recent judgment in Union of India v.

SICOM Limited and another [(2009) 2 SCC 121].  In Allahabad Bank’s case, a two-

Judge Bench was called upon to consider the question whether an application can be

filed under the Companies Act, 1956 during the pendency of proceedings under the

DRT Act.  The facts of that case show that Allahabad Bank filed an O.A. before the

Delhi Bench of the DRT under Section 19.  The same was decreed on 13.1.1998.  The

debtor  company  filed  appeal  before  DRAT,  Allahabad.   Canara  Bank  also  filed

application  under  Section  19  before  DRT,  Delhi.   During  the  pendency  of  its

application, Canara Bank filed Interlocutory Application before the Recovery Officer

for impleadment in the proceedings arising out of O.A.  filed by Allahabad Bank.

That  application  was  dismissed  on  28.9.1998.   In  the  auction  conducted  by  the

Recovery Officer, the property of the debtor company was auctioned and the sale was

confirmed.  Thereupon, Canara Bank filed applications under Section 22 of the DRT

Act.   During  the  pendency  of  the  applications,  Canara  Bank  filed  company

application in Company Petition No. 141 of 1995 filed by Ranbaxy Ltd. against M.S.

Shoes Company under Sections 442 and 537 of the Companies Act for stay of the

proceedings of recovery case No. 9/1998 instituted by the Allahabad Bank.  By an

order dated 9.3.1999, the learned Company Judge stayed further sale of the assets of

the Company.  Allahabad Bank challenged the order of the learned Company Judge

by filing petition for special leave to appeal.  It was argued on behalf of the appellant,

i.e., Allahabad Bank that the DRT Act is a special statute intended for expeditious

adjudication and recovery of debts due to banks and financial  institutions and in

view of  Section  34(1)  of  that  Act  read with  sub-section  (2)  thereof,  the  company

courts do not have jurisdiction to entertain the application filed by the respondent-

bank.  It was argued on behalf of the appellant that in view of the amendment made

in  Section  19(19)  of  the  DRT  Act,  only  Section  529A  of  the  Companies  Act  is

attracted and that too for a limited purpose, i.e., recovery of dues of the workmen.

On behalf  of the respondent-bank it  was argued that during the pendency of the

winding up petition, the company court can pass appropriate order by entertaining

an application filed under Section 446 read with Section 537 of the Companies Act.

After noticing the rival contentions, this Court framed six points for determination,

first four of which were:

“(1) Whether in respect of proceedings under the RDB Act at the stage of  adjudication for the money due to the banks or financial institutions and at the stage of execution for recovery of monies  under  the  RDB  Act,  the  Tribunal  and  the  Recovery Officers  are  conferred  exclusive  jurisdiction  in  their  respective spheres? (2) Whether for initiation of  various  proceedings by the banks and financial institutions under the RDB Act, leave of the Company Court is necessary under Section 537 before a winding- up  order  is  passed  against  the  company  or  before  provisional liquidator  is  appointed  under  Section 446(1)  and  whether  the Company Court can pass orders of stay of proceedings before the Tribunal, in exercise of powers under Section 442? (3) Whether  after a  winding-up  order  is  passed  under Section 446(1) of the Companies Act or a provisional liquidator is appointed,  whether  the  Company  Court  can  stay  proceedings under  the  RDB  Act,  transfer  them  to  itself  and  also  decide questions of liability, execution and priority under Section 446(2)

and  (3)  read  with  Sections  529,  529-A  and  530  etc.  of  the Companies  Act  or  whether  these  questions  are  all  within  the exclusive jurisdiction of the Tribunal? (4) Whether in case it  is decided that the distribution of monies  is  to  be  done  only  by  the  Tribunal,  the  provisions  of Section  73  CPC  and  sub-sections  (1)  and  (2)  of  Section  529, Section  530 of  the  Companies  Court  also  apply  — apart  from Section 529-A — to the proceedings before the Tribunal under the RDB Act?”

The Court referred to various provisions of the DRT Act (in the judgment that Act

was referred to as “RDB Act”) and Companies Act and held:

“21. In our opinion, the jurisdiction of the Tribunal in regard to adjudication is  exclusive.  The  RDB  Act  requires  the  Tribunal alone to decide applications for recovery of debts due to banks or financial institutions. Once the Tribunal passes an order that the debt is due, the Tribunal has to issue a certificate under Section 19 (22) [formerly under Section 19(7)]  to the Recovery Officer for recovery  of  the  debt  specified  in  the  certificate.  The  question arises as to the meaning of the word “recovery” in Section 17 of the  Act.  It  appears  to  us  that  basically  the  Tribunal  is  to adjudicate the liability of the defendant and then it has to issue a certificate under Section 19(22). Under Section 18, the jurisdiction of any other court or authority which would otherwise have had jurisdiction but for the provisions of the Act, is ousted and the power to  adjudicate upon the liability is exclusively vested in the Tribunal.  (This  exclusion  does  not  however  apply  to  the jurisdiction of the Supreme Court or of a High Court exercising power under Articles 226 or 227 of the Constitution.) This is the effect of Sections 17 and 18 of the Act.

22. We hold that the provisions of Sections 17 and 18 of the RDB Act  are  exclusive  so  far  as  the  question  of  adjudication of  the liability of the defendant to the appellant Bank is concerned.”

The  Court  then  referred  the  recommendations  of  the  Tiwari  Committee  and

Narasimham Committee regarding priorities of the secured creditors and held:

“Section 19(19) is clearly inconsistent with Section 446 and other provisions of the Companies Act. Only Section 529-A is attracted to  the  proceedings  before  the  Tribunal.  Thus,  on  questions  of adjudication,  execution and  working  out  priorities,  the  special provisions made in the RDB Act have to be applied.

For the aforesaid reasons, we hold that at the stage of adjudication under Section 17 and execution of the certificate under Section 25 etc.  the  provisions  of  the  RDB  Act,  1993  confer  exclusive jurisdiction on the Tribunal and the Recovery Officer in respect of debts payable to banks and financial institutions and there can be no interference by the Company Court under Section 442 read with Section 537 or under Section 446 of the Companies Act, 1956. In respect of the monies realised under the RDB Act, the question of priorities among the banks and financial institutions and other creditors can be decided only by the Tribunal under the RDB Act and in accordance with Section 19(19) read with Section 529-A of the Companies Act and in no other manner. The provisions of the RDB  Act,  1993  are  to  the  above  extent  inconsistent  with  the provisions of the Companies Act, 1956 and the latter Act has to yield  to  the  provisions  of  the  former.  This  position  holds  good during the pendency of the winding-up petition against the debtor Company and also after a winding-up order is passed. No leave of the Company Court is necessary for initiating or continuing the proceedings under the RDB Act, 1993. Points 2 and 3 are decided accordingly  in  favour  of  the  appellant  and  against  the respondents.”

On the issue of the workers’ claim under Section 529A of the Companies Act, the

Court observed/held:

“61. The respondent’s contention that Section 19(19) gives priority to all “secured creditors” to share in  the sale proceeds before the Tribunal/ Recovery Officer cannot, in our opinion, be accepted.  The  said  words  are  qualified  by  the  words “in accordance  with  the  provision  of  Section  529-A”.  Hence,  it  is necessary to identify the above limited class of secured creditors who have priority over all others in accordance with Section 529- A.

62. Secured creditors fall under two categories. Those who desire  to  go  before  the  Company  Court  and those  who  like  to stand outside the winding- up.

63. The first category of secured creditors mentioned above are  those  who  go  before  the  Company  Court  for  dividend  by relinquishing  their  security  in  accordance  with  the  insolvency rules  mentioned in  Section  529.  The  insolvency  rules  are  those contained in Sections 45 to 50 of the Provincial  Insolvency Act. Section 47(2) of that Act states that a secured creditor who wishes to come before the official liquidator has to prove his  debt and he can  prove  his  debt  only  if  he  relinquishes  his  security  for  the benefit of the general body of creditors. In that event, he will rank with  the  unsecured  creditors  and  has  to  take  his  dividend  as provided in Section 529(2).  Till today, Canara Bank has not made it clear whether it wants to come under this category.

64. The second class of secured creditors referred to above are those who come under Section 529-A(1)(b) read with proviso (c) to Section 529(1). These are those who opt to stand outside the winding-up to realise their security. Inasmuch as Section 19(19) permits distribution to secured creditors only in accordance with Section 529-A, the said category is the one consisting of creditors who stand outside the winding up. These  secured creditors in certain circumstances can come before the Company Court  (here,  the  Tribunal)  and  claim  priority  over  all  other creditors for release of amounts out of the other monies lying in the Company Court (here, the Tribunal). This limited priority is declared in Section 529-A(1) but it is restricted only to the extent specified  in  clause  (b)  of  Section  529-A(1).  The  said  provision refers  to  clause  (c)  of  the  proviso  to  Section  529(1)  and  it  is necessary to understand the scope of the said provision.”

43. Similar view was expressed in A.P. State Financial Corporation v. Official

Liquidator  (supra).   A  learned  Single  Judge  of  the  High  Court  allowed  the

applications filed by the appellant under Section 446(1) of the Companies Act read

with Section 29 and 46 of the SFC Act subject to the condition that the appellant

would undertake to discharge its liability due to workers under Section 529A of the

Companies Act.  While dismissing the appeal of the Corporation, this Court held that

non  obstante clause  contained  in  Section  529A  of  the  Companies  Act  being  a

subsequent enactment prevails over Section 29 of the SFC Act.

44. The judgment in Allahabad Bank’s case was distinguished by a two-Judge

Bench judgment in ICICI Bank Ltd. v. SIDCO Leathers Ltd. and others (supra).  In

that case the appellant and Punjab National Bank had advanced loans to respondent

no.1  for  setting  up  a  plant  for  manufacture  of  leather  boards  and for  providing

working capital funds respectively.  Respondent No. 1 created first charge in favour

of the appellant along with other financial institutions, i.e., IFCI and IDBI by way of

equitable mortgage by deposit of title deeds of its immovable property.  A second

charge  was  created  in  favour  of  Punjab  National  Bank  by  way  of  constructive

delivery of title deeds, clearly indicating that the charge in favour of the latter was

subject to and subservient to charges in  favour of IFCI, IDBI and ICICI.  On an

application filed by respondent No.1, the Allahabad High Court passed winding up

order and appointed official liquidator.  The appellant filed suit for recovery of the

amount credited  to respondent  No.1.   The said  suit  was  transferred to the Debts

Recovery  Tribunal,  Bombay.   During  the  pendency  of  proceedings  before  the

Tribunal, official liquidator was granted permission to continue in the proceedings in

the suit.  Punjab National Bank filed a civil suit for recovery of money payable to it

by respondent No.1.  While the proceedings were pending before the Tribunal and

the Court of Civil Judge, Fatehpur, the assets of the company were sold.  The suit

filed by Punjab National Bank was decreed but the proceedings before the Tribunal

remained pending.  After decree of the suit, the appellant along with IFCI and IDBI

filed an application before the Company Judge for consideration of their claim on

pro rata basis  and also for exclusion of the claim of Punjab National Bank.  The

learned Company Judge allowed the first prayer of the appellant but declined the

second one by relying upon the judgment in Allahabad Bank’s case (supra).  The

intra-court  appeal  was  dismissed  by  the  Division  Bench  by  relying  upon  the

provisions of Section 529A.  On further appeal, this Court referred to the judgment

in Allahabad Bank’s case (supra) as also Rajasthan State Financial Corporation v.

Official Liquidator [(2005) 8 SCC 190] and held:

“Allahabad Bank therefore, is not an authority for the proposition that  in  terms  of  Section  529-A  of  the  Companies  Act  the distinction between two classes of secured creditors does no longer survive. The High Court, thus, in our considered opinion, was not correct in that behalf.

In  fact  in  Allahabad  Bank it  was  categorically  held  that  the adjudication officer would have such powers to distribute the sale proceeds  to  the  banks  and  financial  institutions,  being  secured creditors,  in  accordance  with  inter  se  agreement/arrangement between  them  and  to  the  other  persons  entitled  thereto  in accordance with the priority in law.

Section  529-A of  the  Companies  Act  no  doubt  contains  a  non obstante  clause  but  in  construing  the  provisions  thereof,  it  is necessary to determine the purport and object for which the same was enacted.

In terms of Section 529 of the Companies Act, as it stood prior to its  amendment,  the dues of the workmen were not  treated pari passu with the secured creditors as a result whereof innumerable instances came to the notice of the Court that the workers may not get anything after discharging the debts of the secured creditors. It is only with a view to bring the workmen’s dues pari passu with the secured creditors, that Section 529-A was enacted.

The non obstante nature of a provision although may be of wide amplitude,  the  interpretative  process  thereof  must  be  kept confined to the  legislative policy.  Only  because the  dues  of  the workmen and the debts due to the secured creditors are treated pari passu with each other, the same by itself, in our considered view, would not lead to the conclusion that the concept of inter se priorities  amongst  the  secured  creditors  had  thereby  been intended to be given a total go-by.

A  non  obstante  clause  must  be  given  effect  to,  to  the  extent Parliament intended and not beyond the same.

Section 529-A of the Companies Act does not  ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read thereinto things, which Parliament did not comprehend.”

45. In Transcore v. Union of India (supra), a two-Judge Bench made detailed

analyses of the provisions of the DRT Act and formulated the following points for

consideration:-  

(i) Whether  the  banks  or  financial  institutions  having elected to seek their remedy in terms of the DRT Act, 1993 can still  invoke  the  NPA Act,  2002  for  realising  the  secured  assets without  withdrawing  or  abandoning  the  OA  filed  before  DRT under the DRT Act.

(ii) Whether  recourse  to  take  possession  of  the  secured assets of the borrower in terms of Section 13(4) of the NPA Act comprehends  the  power  to  take  actual  possession  of  the immovable property.

(iii) Whether ad valorem court fee prescribed under Rule 7

of the DRT (Procedure) Rules, 1993 is payable on an application under Section 17(1) of the NPA Act in the absence of  any rule framed under the said Act.  

In dealing with the afore-mentioned questions, the Court noticed the arguments of

learned counsel for the parties and proceeded to observe:-

“Keeping  in  mind  the  above  circumstances,  the  NPA  Act  is enacted for quick enforcement of the security. The said Act deals with enforcement of the rights vested in the bank/FI. The NPA Act  proceeds  on  the  basis  that  security  interest  vests  in  the bank/FI. Sections 5 and 9 of the NPA Act are also important for preservation of  the  value  of  the  assets  of  the banks/FIs.  Quick recovery of debt is important. It is the object of the DRT Act as well as the NPA Act. But under the NPA Act, authority is given to the banks/FIs, which is not there in the DRT Act, to assign the secured  interest  to  securitisation  company/asset  reconstruction company. In cases where the borrower has bought an asset with the finance of the bank/FI, the latter is treated as a lender and on assignment  the  securitisation  company/asset  reconstruction company steps  into  the shoes  of  the  lender bank/FI  and it  can recover the lent amounts from the borrower.

Therefore, when Section 13(4) talks about taking possession of the secured assets or management of the business of the borrower, it is  because  a  right  is  created  by the  borrower  in  favour of  the bank/FI when he takes a loan secured by pledge, hypothecation, mortgage or charge. For example, when a company takes a loan and pledges its financial asset, it is the duty of that company to see that  the  margin  between  what  the  company  borrows  and  the extent to which the loan is covered by the value of the financial asset hypothecated is retained. If the borrower company does not repay, becomes a defaulter and does not keep up the value of the financial  asset  which  depletes  then  the  borrower  fails  in  its obligation which results in a mismatch between the asset and the liability in the books of the bank/FI. Therefore, Sections 5 and 9 talk of acquisition of the secured interest so that the balance sheet of  the  bank/FI  remains  clean.  Same  applies  to  immovable property charged or mortgaged to the bank/FI. These are some of the factors which the authorised officer of the bank/FI has to keep in mind when he gives notice under Section 13(2) of the NPA Act. Hence,  equity  exists  in  the  bank/FI  and  not  in  the  borrower. Therefore,  apart  from  obligation  to  repay,  the  borrower undertakes  to  keep  the  margin  and  the  value  of  the  securities hypothecated  so  that  there  is  no  mismatch  between  the  asset- liability in the books of the bank/FI. This obligation is different and  distinct  from  the  obligation  to  repay.  It  is  the  former obligation  of  the  borrower which  attracts  the  provisions  of  the NPA  Act  which  seeks  to  enforce  it  by  measures  mentioned  in Section  13(4)  of  the  NPA  Act,  which  measures  are  not

contemplated by the DRT Act and, therefore, it is wrong to say that  the  two  Acts  provide  parallel  remedies  as  held  by  the judgment of the High Court in  Kalyani Sales Co.  As stated, the remedy under the DRT Act falls short as compared to the NPA Act which refers to acquisition and assignment of the receivables to  the  asset  reconstruction  company  and  which  authorises banks/FIs to take possession or to take over management which is not there in the DRT Act. It is for this reason that the NPA Act is treated  as  an  additional  remedy  (Section  37),  which  is  not inconsistent with the DRT Act.”

The Court then adverted to the concept of possession envisaged under Section 13(4)

and held:

“The word possession is a relative concept.  It is not an absolute concept.  The dichotomy between symbolic an physical possession does not find place in the NPA Act.  Basically, the NPA Act deals with  the  mortgage  type  of  securities  under  which  the  secured creditor,  namely,  the  bank/FI  obtains  interest  in  the  property concerned.   It  is  for  this  reason  that  the  NPA  Act  ousts  the intervention of the courts/tribunals.  Section 13(4-A) refers to the word “possession” simpliciter.  There is no dichotomy in Section 13(4-A) as pleaded on behalf of the borrowers.

The scheme of Section 13(4) read with Section 17(3) of the NPA Act shows that if the borrower is dispossessed, not in accordance with the provisions of the NPA Act, then DRT is entitled to put the clock back by restoring the status quo ante.  Therefore, it cannot be said that if possession is taken before confirmation of sale, the rights  of  the  borrower to get  the dispute adjudicated upon  are defeated by the authorised officer taking possession.  The NPA Act provides for recovery of possession by non-adjudicatory process; therefore, to say that the rights of the borrower would be defeated without adjudication would be erroneous.

Rule 8 of the Security Interest (Enforcement) Rules, 2002 (“2002 Rules”)  deals  with  the  stage  anterior  to  the  issuance  of  sale certificate and delivery of possession under Rule 9.  Till the time of issuance of sale certificate, the authorised officer is like a Court Receiver under Order 40 Rule 1 CPC.  The Court Receiver can take  symbolic  possession  and  in  appropriate  cases  where  the Court  Receiver  finds  that  a  third-party  interest  is  likely  to  be created overnight, he can take actual possession even prior to the decree.  The authorised officer under Rule 8 has greater powers than even a Court Receiver as security interest in the property is already created in favour of the banks/FIs.  That interest needs to be protected.  Therefore, Rule 8 provides that till issuance of the sale certificate under Rule 9, the authorised officer shall take such steps as he deems fit to preserve the secured asset.  It is well settled

that third-party interests are created overnight and in very many cases those third parties take up the defence of being a bona fide purchaser for value without notice.  It is these types of disputes which are sought to be avoided by Rule 8 read with Rule 9 of the 2002  Rules.   In  the  circumstances,  the  drawing  of  dichotomy between symbolic and actual possession does not find place in the scheme of the NPA Act read with the 2002 Rules.”

The Court then considered three provisos inserted in Section 19(1) of the DRT Act by

amending Act No.30 of  2004 and held that withdrawal of  the OA pending before

Tribunal under the DRT Act is not a condition precedent for taking recourse to the

Securitisation Act.

46. In Union of India v. SICOM Limited and another (supra), this Court was

called upon to decide whether realization of the duty under the Central Excise Act

will have priority over the secured debts in terms of the SFC Act.  The facts of that

case  were  that  respondent  no.2  borrowed  a  sum  of  Rs.51  lakhs  from  the  first

respondent by an indenture of mortgage executed on 22.12.1986.  Respondent No.2

also owed Rs.19 lakhs by way of central excise duty for the period April 1983 to May

1988.  By a notification issued under Section 46(1) of the SFC Act, the Government

extended the provisions of Sections 27, 29, 30, 31, 32-A to 32-F, 41 and 41-A of the

SFC  Act  in  favour  of  the  first  respondent.   Since  respondent  no.2  defaulted  in

repayment of loan given by the first respondent, the latter invoked Section 29 of the

SFC Act and took physical possession of the mortgaged assets.  When the department

expressed its intention to attach and seize the properties of respondent no.2, the first

respondent  informed that  it  had  first  charge  over  the  mortgaged  properties.   In

August 2000, the first respondent issued a legal notice to the appellant and then filed

a writ  petition under Article  226 of  the Constitution of  India  in the Aurangabad

Bench of the Bombay High Court.   The High Court considered the provisions of

Rule 213(2) of the Central Excise Rules read with Section 32(g) and Section 151 of the

Maharashtra Land Revenue Code, 1966 and held that as security of the corporation

was prior in point of time, the dues claimed by it will have priority over the dues of

customs.   A  two-Judge  Bench  of  this  Court  referred  to  the  non  obstante clause

contained in  Section  46B of  the  SFC Act  and provisions  of  priority  contained in

Section  529A  of  the  Companies  Act  as  also  the  provisions  of  EPF Act  and  the

Employees State Insurance Act,  the judgments in Builders Supply  Corporation v.

Union of India (supra), Bank of Bihar v. State of Bihar [(1972) 3 SCC 196], Dena

Bank v.  Bhikhabhai  Prabhudas  Parekh & Co.  (supra),  Central  Bank  of  India  v.

Siriguppa Sugars & Chemicals Ltd. [(2007) 8 SCC 353], State Bank of Bikaner &

Jaipur v. National Iron & Steel Rolling Corporation and others (supra), ICICI Bank

Ltd. v. SIDCO Leathers Ltd. and others (supra) and approved the view taken by the

High Court.   

47. In none of the afore-mentioned judgments this Court held that by virtue of

the provisions contained in the DRT Act or Securitization Act, first charge has been

created in favour of banks, financial institutions etc.  Not only this, the Court was

neither  called  upon  nor  it  decided  competing  priorities  of  statutory  first  charge

created under Central legislation(s) on the one hand and State legislation(s) on the

other  nor  it  ruled  that  statutory first  charge  created  under  a  State  legislation  is

subservient to the dues of banks, financial institutions etc. even though statutory first

charge has not been created in their favour.  The ratio of the judgment in Allahabad

Bank’s case (supra) is that jurisdiction of adjudicatory mechanism established under

the DRT Act is exclusive and no other court or authority created under any other law

can interfere with the proceedings initiated by banks and financial institutions for

recovery of their dues.  The other proposition laid down in that case which appear to

have  been  diluted  by  a  co-ordinate  bench  in  ICICI  Bank’s  case   is  that  while

distributing the money recovered by a bank or a financial institution, priority given

to the workers’ dues in terms of Section 529A must be respected.  Section 11 of the

Central Excise Act, which was considered by the two-Judge Bench in SICOM’s case,

does not contain a provision similar to those in Central legislations like Section 14A

of the Workmen’s Compensation Act, 1923, Section 11 of the  EPF Act, Section 74(1)

of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Development

and Regulation) Act, 1957, Section 30 of the Gift Tax Act, 1958 and Section 529A of

the Companies  Act,  1956,  under which statutory first  charge has been created in

respect of the dues of workmen or gift tax etc.

48. On  the  basis  of  above  discussion,  we  hold  that  the  DRT  Act  and

Securitisation Act do not create first charge in favour of banks, financial institutions

and  other  secured  creditors  and  the  provisions  contained  in  Section  38C  of  the

Bombay  Act  and  Section  26B  of  the  Kerala  Act  are  not  inconsistent  with  the

provisions of the DRT Act and Securitisation Act so as to attract non obstante clauses

contained in Section 34(1) of the DRT Act or Section 35 of the Securitisation Act.

49. Another argument of some of the learned counsel for the appellants is that

the prior charge created in favour of the bank would prevail  over the subsequent

mortgage created in favour of the State.  Dr. Bishwajit Bhattacharyya, learned senior

counsel appearing for the Indian Overseas Bank heavily relied on the judgment of

three-Judge  Bench  in  Dattatreya Shanker  Mote  and  others  v.  Anand Chintaman

Datar  and  others  (supra)  and  argued  that  the  view expressed  in  the  subsequent

judgments  in  State  Bank  of  Bikaner  & Jaipur  v.  National  Iron  & Steel  Rolling

Corporation and others (supra) and R.M. Arunachalam v. Commissioner of Income

Tax, Madras [(1997) 7 SCC 698] requires reconsideration because the same are based

on  misrepresentation  of  the  judgment  in  Dattatreya’s  case.   He pointed  out  that

Section 26B of the Kerala Act was inserted with effect from 1.4.1999 and argued that

the same cannot prevail over the prior charge created in favour of the bank in 1973

because the latter could not have had any notice of a charge created in future.  Other

learned senior counsel referred to the provisions of Sections 58, 69 and 100 of the

Transfer of Property Act and argued that the charge is  not a  mortgage although

principles applicable to simple mortgage also apply to a charge and, therefore, the

State cannot claim priority on the basis of non obstante  clauses contained in Section

38C of the Bombay Act or Section 26B of the Kerala Act and similar other State

legislations.  They further argued that the provisions of the State Acts cannot apply

with retrospective effect so as to affect the right of banks and financial institutions

and other secured creditors to recover their dues from the borrowers.

50. Shri Rakesh Dwivedi,  learned senior counsel appearing for the State of

Kerala argued that statutory first  charge created in favour of the State will  have

precedence over a mortgage created in favour of bank etc. and the judgments in State

Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and others

(supra) and R.M. Arunachalam v. Commissioner of Income Tax, Madras (supra) do

not require reconsideration.  He pointed out that in Dattatreya’s case the Court was

not  dealing with  statutory first  charge whereas  in  the  other  cases  the Court  had

specifically  dealt  with  such  charge  created  in  favour  of  the  State.   Shri  Dwivedi

pointed out that Section 69 does not apply to a case involving a secured creditor or

Government.  On the issue of retrospectivity, the learned senior counsel submitted

that from the date of insertion of Section 26B in the Kerala Act, the dues of sales tax

became first charge over the property of the borrower and the same would super-

impose on the mortgage created in favour of the bank.  In support of this argument,

he relied on the judgments of K.S. Paripoornan v. State of Kerala and others [JT

1994 (6) SC 182 = (1994) 5 SCC 593] and Land Acquisition Officer v. B.V. Reddy and

others [(2002) 3 SCC 463].

51. We shall first refer to the judgment in Dattatreya’s case.  In that case, the

three-Judge Bench considered the question of priority between a charge created by a

decree and a subsequent simple mortgage.  The appellants in that case filed suit for

recovery of Rs.1,34,000/- with interest from respondent  Nos.1 to 7. On March 31,

1941, a compromise decree was passed under which a charge was created for the

decretal amount on three pieces of property belonging to respondent Nos. 1 to 7.  The

decree  was  registered  on  April  7,  1941,  but  due  to  inadvertence  the  charge  on

Kakakuva Mansion at Poona was not shown in the index of registration.  On June 27,

1949, respondent Nos. 1 to 7 mortgaged Kakakuva Mansion to plaintiff-respondent

No. 14 for a sum of Rs.1,00,000/-.  They also created a further charge on September

13, 1949 in favour of plaintiff-respondent no. 14 for Rs.50,000/-.  On July 7, 1951, a

charge  was  created  by  a  decree  in  favour  of  respondent  No.15  for  a  sum  of

Rs.59,521/11/-.   In the meantime, the appellants recovered some amount by execution

of the decree.  They sold the property at Shukrawar Peth at Poona and the chawl at

Kalyan.  Thereafter, they filed a darkhast in the Court of the 3rd Joint Civil Judge,

Senior Division,  Poona for sale of Kakakuva Mansion.  Notices were issued under

Order 21 Rule 66 CPC to respondent no. 14 and others.  Later on, the executing court

held  that  presence  of  plaintiff-respondent  no.14  was  not  necessary.   The  latter

challenged that order in First Appeal No.668 of 1957 filed before the High Court of

Bombay.  He also filed a civil suit in the Court of Joint Civil Judge, Senior Division,

Poona for recovery of Rs.2,18,564/- allegedly due to him under the two mortgages.

During the pendency of that suit, the property was put up for sale on the darkhast of

the appellants, who themselves purchased the property with the leave of the Court.

As a sequel to this, respondent no.14 impleaded the appellants as parties in suit no. 57

of 1958.  The appellants contested the suit on the ground that they had a prior charge

and the mortgage of respondent no. 14 was subject to that charge.  The trial Judge

decreed the suit in favour of respondent no. 14.  In appeal, the High Court modified

the decree of the trial Judge holding that as the mortgage in favour of the respondent

was protected under  proviso to Section 100,  it  is  free from the charge created in

favour of the appellants.  The High Court also gave priority to respondent no.15 for

its dues, though it had not filed any appeal. The majority judgment of  the

Court was delivered by Jaganmohan Reddy, J. who, after noticing various provisions

of the Transfer of Property Act, observed:

“A  charge  not  being  a  transfer  or  a  transfer  of  interest  in property  nonetheless  creates  a  form  of  security  in  respect  of immovable property. So far as mortgage is concerned, it being a transfer  of  interest  in  property  the  mortgagee  has  always  a security  in  the  property  itself.  Whether  the  mortgage  is  with possession  or  a  simple  mortgage,  the  interest  in  the  property enures to the mortgagee so that any subsequent mortgage or sale always  preserves  the  rights  of  the  mortgagee  whether  the subsequent dealings in the property are with or without notice. The obvious reason for this is that in a mortgage there is always an  equity  of  redemption  vested  in  the  owner  so  that  the subsequent mortgagees or transferees  will  have,  if  they are not careful and cautious in examining the title before entering into a transaction, only the interest which the owner has at the time of the transaction.

Insofar as competing mortgagees are concerned, Section 48 of the Act gives  priority to the first  in point  of  time in whose favour transfer of an interest in respect of the same immovable property is  created,  if  the  interest  which  he  has  taken  and  the  interest acquired  subsequently  by  other  persons  cannot  all  exist  or  be exercised to their  full  extent  together.  This  section  speaks  of  a person who purports to create by transfer at different times rights in or over the same immovable property, and since charge is not a transfer of an interest in or over the immovable property he gets no security as against mortgagees of the same property unless he can show that the subsequent mortgagee or mortgagees had notice of the existence of his prior charge.”

52. In  State  Bank  of  Bikaner  &  Jaipur  v.  National  Iron  &  Steel  Rolling

Corporation and others (supra), another Bench of three Judges considered the effect

of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 by which first charge was

created on the property of the dealer in lieu of the amount of tax, penalty etc. on an

existing mortgage on the property of the dealer.  It is borne out from the judgment

that  the  appellant-bank  had  given  cash  credit  facility  to  respondent  no.1.   For

securing repayment,  respondent no.1 mortgaged the factory premises in favour of

the bank.  In 1986, the appellant filed suit for recovery of Rs.3,79,672/- with interest.

In that suit, Commercial Taxes Officer got himself impleaded as party by asserting

that State had a prior claim for recovery of Rs.1,19,122/- as dues of sales tax.  The

mortgaged  property  was  sold  by  auction  under  the  orders  of  the  Court.   The

Commercial Taxes Officer pleaded that the dues of sales tax should be paid first out

of  the sale  proceeds and the claim of the bank could be  satisfied  only out  of  the

balance amount.  The trial Court upheld the claim of the Commercial Taxes Officer.

The revision filed by the bank was dismissed by the High Court.  Before this Court it

was argued that the bank’s claim will have precedence over the claim of the sales tax

authorities  because  mortgage  in  their  favour  was  prior  in  point  of  time.   After

noticing Section 11-AAAA of the Rajasthan Sales Tax Act which is  pari materia to

Section 38C of the Bombay Act and Section 26B of the Kerala Act as also Section 100

of the Transfer of Property Act and the judgment in Dattatreya’s case, the Court

observed:

“Section 100 of the Transfer of Property Act deals with charges on an immoveable property which can be created either by an act of  parties  or  by  operation  of  law.   It  provides  that  where immoveable  property  of  one  person  is  made  security  for  the payment  of  money  to  another,  and  the  transaction  does  not amount to a mortgage, a charge is created on the property and all the provisions in the Transfer of Property Act which apply to a simple mortgage shall, so far as may be, apply to such charge.   A mortgage on the other hand, is defined under Section 58 of the Transfer of Property Act as a transfer of an interest in specific immoveable property for the purpose of securing the payment of money  advanced  or  to  be  advanced  as  set  out  therein.  The distinction between a mortgage and a charge was considered by this  Court  in  the  case  of  Dattatreya  Shanker  Mote v.  Anand Chintaman Datar [(1974) 2 SCC 799].  The Court has observed (at pages 806-807) that a charge is a wider term as it includes also a mortgage, in that, every mortgage is a charge, but every charge is not a mortgage.  The Court has then considered the application of the second part of  Section 100 of  the Transfer of  Property Act which inter alia deals with a charge not being enforceable against a bona fide transferee of the property for value without notice of

the charge. It has held that the phrase “transferee of property” refers to the transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage.”

The Court then considered the argument made on behalf of the bank that its dues

will  have  priority  because  at  the  time when  the  statutory  first  charge  came into

existence, there was already a mortgage in respect of the same property and held:-

“The argument though ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the  mortgage  dues.  This  does  not,  however,  mean  that  the property ceases to be the property of the mortgagor. The title to the  property  remains  with  the  mortgagor.  Therefore,  when  a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section 11-AAAA of  the  Rajasthan  Sales  Tax  Act  will  operate  on  the property as a whole and not only on the equity of redemption as urged by Mr. Tarkunde.

In  the  present  case,  the  section  creates  a  first  charge  on  the property, thus clearly giving priority to the statutory charge over all  other  charges  on  the  property  including  a  mortgage.   The submission,  therefore,  that  the  statutory  first  charge  created under  Section  11-AAAA  of  the  Rajasthan  Sales  Tax  Act  can operate only over the equity of redemption, cannot be accepted. The charge operates on the entire property of the dealer including the interest of the mortgagee therein.   

Looked at a little differently, the statute has created a first charge on the property of the dealer.  What is meant by a “first charge”? Does it have precedence over earlier mortgage?  Now, as set out in Dattatreya Shankar Mote case a charge is a wider term than a mortgage.   It  would  cover  within  its  ambit  a  mortgage  also. Therefore, when a first charge is created by operation of law over any property, that charge will  have precedence over an existing mortgage.”

(Emphasis added)

53. In R.M. Arunachalam v. Commissioner of Income Tax, Madras (supra),

the Court reiterated the distinction between a charge and a mortgage  in the context

of the provisions contained in Sections 53(1) and 74(1) of the Estate Duty Act, 1953,

referred to the judgments in Dattatreya’s case, State Bank of Bikaner & Jaipur v.

National Iron & Steel Rolling Corporation and others (supra) and observed:

“A charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged while in a charge  no  interest  is  created  in  the  property  charged  so  as  to reduce the full ownership to a limited ownership.  The creation of a  charge  under  Section  74(1)  of  the  Estate  Duty  Act  cannot, therefore, be construed as creation of an interest in property that is  the  subject-matter  of  the  charge.  The  creation  of  the  charge under Section 74(1) only means that in the matter of recovery of estate duty from the property which is the subject-matter of the charge the amount recoverable by way of estate duty would have priority over the liabilities of the accountable person. In that sense the claim in respect of estate duty would have precedence over the claim of the mortgagee because a mortgage is also a charge. The High  Court  has,  therefore,  rightly  held  that  as  a  result  of  the charge created under Section 74(1) of the Estate Duty Act, it could not be said that title of the assessee to the immovable properties received  by  him  from  Smt  Umayal  Achi  was  incomplete  and imperfect in any way. In the context of the facts, the High Court has found that the assessee had admittedly become the full owner of  the  assets  even  before  the  payment  of  estate  duty  and  on payment of the same he had not acquired a new right, tangible or intangible,  in  the  assets.  It  cannot,  therefore,  be  said  that  the amount proportionate to estate duty paid by the assessee on the properties  that  were  transferred  should  be  treated  as  “cost  of acquisition  of  the  assets”  under  Sections  48  and  49  read  with Section 55(2) of the IT Act. Since the title of the assessee to the immovable properties acquired was not incomplete and imperfect in any way, it cannot also be said that as a result of the payment of the estate duty by the assessee there was an improvement in the title of  the assessee and the said payment could be regarded as “cost of improvement” under Section 48 read with Section 55(1)(b) of the Act.”

54. In  our  opinion,  the  judgments  in  State  Bank  of  Bikaner  &  Jaipur  v.

National  Iron  &  Steel  Rolling  Corporation  and  others  (supra)  and  R.M.

Arunachalam  v.  Commissioner  of  Income Tax,  Madras  (supra)  are   based  on  a

correct reading of the ratio of the Dattatreya’s case and the propositions laid down

therein  do  not  call  for  reconsideration.  At  the  cost  of  repetition,  we  consider  it

appropriate to observe that in Dattatreya’s case the Court was not dealing with the

statutory first charge created in favour of the State.

55. The  argument  of  learned  counsel  for  the  appellants  that  the  State

legislations creating first charge cannot be given retrospective effect deserves to be

negatived in view of the judgment in State of M.P. and another v.  State Bank of

Indore (supra).  In that case, it was held that the charge created in favour of the State

under Section 33C of the Madhya Pradesh General Sales Tax Act, 1958 in respect of

the sales tax dues prevail over the charge created in favour of the bank in respect of

the loan taken by 2nd respondent and the amendment made in the State operates in

respect of charges that are in force on the date of introduction of Section 33C.

56. We shall now deal with the individual cases.

57. C.A. No. 95/2005 Central Bank of India v. State of Kerala and others –

The facts of the case have been set out in the earlier part of the judgment.

A  recapitulation  thereof  shows  that  suit  filed  by  the  appellant  bank  in  1996  for

recovery  of  its  dues  was,  later  on,  transferred  to  the  Tribunal  and  decreed  on

1.12.2000.  Before that the Tehsildar, Mavelikara had attached the properties of the

borrower on 2.2.2000 and again on 4.9.2000 for recovery of the arrears of sales tax.

The bank challenged the notice issued by Tehsildar for recovery of the arrears of

sales tax but could not persuade the learned Single Judge who held that in view of

Section 26B of the Kerala Act, dues of the State will have priority.  The order of the

learned Single Judge was approved by the Division Bench.  In our opinion, the view

taken by Kerala High Court is in consonance with what we have held in the earlier

part of the judgment regarding primacy of the State’s first charge over the dues of

banks, financial institutions and secured creditors.  Therefore, the impugned orders

do not call for any interference.

58. C.A.  No.2811/2006  –  The  Thane  Janata  Sahakari  Bank  Ltd.  vs.  The

Commissioner of Sales Tax & Others – In this case the bank had taken possession

of the mortgaged assets on 15.2.2005 and sold the same.  On 11.7.2005, the officers of

the Commercial Tax Department informed the bank about outstanding dues of sales

tax amounting to Rs. 3,62,82,768/-.  The Assistant Commissioner issued notice under

Section  39  of  the  Bombay  Act  for  recovery  of  Rs.48,48,614/-.   The  High  Court

negatived the bank’s claim of priority and held that Section 35 of the Securitisation

Act does not have overriding effect over Section 33C of the Bombay Act.  The view

taken by the High Court is unexceptional and calls for no interference.

59. C.A. No.3549/2006 – Indian Overseas Bank vs. Kerala State and Others  –

Respondent  no.3  in  this  appeal,  namely,  Cheruvathur  Brothers,

Chalissery, Palakkad District availed various credit facilities from the appellant-bank

and  created  mortgage  in  latter’s  favour  for  securing  repayment.  On  11.2.1994,

Deputy Tehsildar (RR), Ottapalam (Kerala) requested the bank to furnish details of

the properties mortgaged by respondent no.3 by stating that action was to be initiated

under the Kerala General Sales Tax Act and the Kerala Revenue Recovery Act for

recovery of the arrears of sales tax.  The bank claimed that it was a secured creditor

and  had  a  prior  charge  over  the  mortgaged  properties.   Thereafter,  recovery

proceedings were initiated by Deputy Tehsildar.  The bank filed suit for injunction

bearing OS No.133/1994 with the prayer that State of Kerala and Deputy Tehsildar

(RR), Ottapalam be restrained from attaching and selling the mortgaged property as

described in  the  schedule  attached  with  the  plaint.   The  bank  filed  another  suit

against  respondent  no.3  and 4 for recovery of  its  dues.   On the establishment  of

Chennai Bench of Tribunal, the second suit was transferred and numbered as T.A.

No.1284/1997.  By an order dated 31.12.1998, the Tribunal allowed the application of

the bank and issued recovery certificate for a sum of Rs.23,80,430.95.  Thereafter,

Recovery Officer, DRT, Chennai issued notice dated 6.10.1999 to respondent nos.3 to

5 to pay the dues of bank in terms of the decree passed by the Tribunal.

60. The suit  for injunction filed by the bank was dismissed by Sub Judge,

Ottapalam vide judgment dated 21.12.1999.  The trial Court held that the plaintiff

has not produced any evidence to show that it had got a mortgage from defendant

no.3 and on that premise the bank’s plea for injunction was negated.  Appeal Suit

No.177/2000 filed by the bank was dismissed by the learned Single Judge of the High

Court vide judgment dated January 19, 2005.  Further appeal preferred by the bank

was dismissed by the Division Bench of the High Court on 12.7.2005 by relying upon

the judgment of the Full Bench of the High Court in Kesava Pillai vs. State of Kerala

[2004 (1) KLT 55] by observing that the appeal is not maintainable.  In our opinion,

the  bank  cannot  claim priority  over  the  dues  of  sales  tax because  statutory first

charge had been created in favour of the State by Section 26B which was inserted in

the Kerala Act with effect from 1.4.1999 and the courts below did not commit any

error by refusing to decree the suit for injunction filed by the bank.

61. C.A. No.3973 of 2006 -- Bank of Baroda vs. State of Kerala and others –

The appellant-bank extended the loan facilities to respondent no.2 – M/s.

Eastern Cashew Company. Respondent No.3, Mrs. Meena Vasanth gave guarantee

and mortgaged immovable property to secure the dues of the bank.  On account of

the borrower’s failure to repay the loan amount, the bank filed O.S. No. 133/86 in the

Court of Sub Judge, Kollam.  The same was decreed on 23.3.1993.  The judgment of

the  trial  Court  was  challenged  by  the  borrower  in  A.S.  No.  229/1994.

Notwithstanding this, the bank filed Execution Petition No. 159/1994 for execution of

the decree.   During the execution proceedings,  Tehsildar,  Kollam issued notice to

respondent  no.3  under  Section  49(2)  of  the  Kerala  Revenue  Recovery  Act  for

payment of arrears of sales tax amounting to Rs.1,19,86,461/-.  He also indicated that

41.80 acres of land in revenue survey no. 680/2 will be sold for realization of sales tax

dues.  The borrowers challenged the notice by filing writ petitions in the High Court,

which were dismissed on 13.10.2005 and it was held that the State authorities were

free to take action under the Kerala Act.  Thereafter, the bank filed Writ Petition

No.7464/2006, questioning the notice issued by the Tehsildar under Kerala Revenue

Recovery Act. The learned Single Judge dismissed the writ petition by observing that

sale was being conducted under the Revenue Recovery Act pursuant to the judgment

of  the  Court.   Writ  Appeal  No.538/2006 was  dismissed by the Division  Bench by

placing reliance upon the judgment in South Indian Bank Limited vs. State of Kerala

[2006 (1) KLT 65] in which the following view was expressed:

“Right of the State to have priority in the matter of recovery of sales tax from the defaulters over the equitable mortgages created by them in favour of Banks and Financial Institutions is no more res integra. Dealing with the provisions parallel to Section 26B of the Kerala General Sales Tax Act by the various Sales Tax Laws of  other  States,  Supreme  Court  has  already  recognized  the statutory first  charge in  respect  of  sales tax arrears.  Reference may be made to the decisions of the Apex Court in State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and Ors.  (1995) 96 STC 612),  Delhi  Auto and General Finance Pvt. Ltd. v. Tax Recovery Officer and Ors. (1999) 114 STC 273), Dattatreya Shanker Mote v. Anand Chintaman Datar, Dena Bank v.  Bhikhabhai  Prabhudas  Prakash  Co.  and  various  other decisions. We may refer to the latest decision of the Apex Court in State of M.P. v. State Bank of Indore, wherein the court examined the charge created under Section 33C of the M.P. General Sales Tax Act, 1958 and held that Section 33C creates a statutory first charge that prevails over any charge that may be in existence. The Court held that the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over  the  charge  created  in  favour  of  the  Bank.  Judicial pronouncements settled the law once for all stating that State has got priority in the matter of recovery of debts due and the specific statutory charge created under the Sales Tax Act notwithstanding the equitable mortgages created by the defaulters in favour of the Banks  prior  to  the  liability  in  favour  of  the  State.  A Division Bench of this Court in Sherry Jacob v. Canara Bank, held that revenue  recovery  authorities  shall  have  the  liberty  to  proceed against the property of the company under the Revenue Recovery Act on the strength of the first charge created over the property by virtue of Section 26B of the Kerala General Sales Tax Act. The Court held that the statutory first charge would prevail over any

charge or right in favour of a mortgage or secured creditors and would get precedence over an existing mortgage right.

We are in this  case concerned with  the question as to  whether Section 26B of the K.G.S.T. Act would take away the efficacy of a decree passed by the civil court prior to the introduction of said section.  We are  of  the  view till  the  decree  is  executed through executing court title of the mortgaged property remains with the mortgagor.  Decree  passed  by  the  civil  court  is  the  formal expression of an adjudication which conclusively determines the rights of parties, but unless and until the decree is executed the Bank would not procure the property and the State's overriding rights would have precedence over that of the Bank. When a first charge created by the operation of law over any property, that charge will  have precedence over an existing mortgage and the decree obtained by the bank against the mortgagor will not affect the State since State was not a party to the suit. Decree has only conclusively  determined  the  rights  between  the  mortgagor  and mortgagee which would not affect the statutory rights of the State. The  expression  "rights  of  parties"  used  in  Section  2(2)  means rights of parties to the suit. State which has got a statutory first charge under Section 26B of the K.G.S.T. Act would prevail over the rights created in favour of the Bank by an unexecuted decree. We therefore hold that the decree obtained by the Bank will not have any precedence over the first charge created in favour of the State under Section 26B of the K.G.S.T. Act.”

In our opinion,  the  High Court  has  rightly held  that  the  first  charge created by

Section 26B of the Kerala Act will have primacy over the bank’s dues.  

62. C.A.  No.4174/2006  –Ahmad  Koya,  Kollam  v.  The  District  Collector,

Kolam & others – In 1974, respondent no.7, Thomas Stephen and Company, Kollam

took loan from Canara Bank.   The company mortgaged two of  its  properties  by

deposit of title deeds as a continuing collateral security.  On 24.8.1992, the bank filed

suit for recovery of its dues.  On creation of bench of the Tribunal at Cochin, the suit

was transferred to the Tribunal, which passed decree dated 17.2.2000 for a sum of

Rs.41,25,451.64 with  interest  at  the rate  of  15% per  annum from 24.8.1992.   On

24.8.2000,  the  bank  obtained  recovery  certificate  against  the  company.   In  the

meanwhile,  Tehsildar  (Revenue  Recovery)  issued  notice  dated  18.7.2000  under

Section 46 of the Kerala Revenue Recovery Act and attached the property of the

company in lieu of the dues of sales tax.  He then issued notice dated 13.2.2001 under

Section 49 of the Kerala Revenue Recovery Act for sale of the property.  The bank

filed Writ Petition (OP No.8845 of 2001) for quashing the sale notice.  By an interim

order, the High Court stayed all proceedings pursuant to the sale notice issued by the

Tehsildar.  Thereafter, the bank initiated proceedings for execution of decree dated

17.2.2000.  As a sequel to this, the mortgaged properties were put to sale.  In the

auction  held  on  31.1.2003,  the  petitioner  gave  bid  of  Rs.60,60,010/-  for  the  first

property admeasuring 40 cents with building thereon.  The second property was not

put to auction apparently because the bid given by the appellant satisfied the bank’s

claim.  On 14.2.2003, the petitioner deposited the bid amount. He was in possession of

the auctioned property excluding the area of 8.50 cents which was in the possession of

the 8th respondent, Sherry Jacob as licensee.  At that stage, the State Government

filed Writ Petition No.26523 of 2003 for quashing the sale proceedings and also for

issue  of  a  direction  to  the  auction  purchaser  to  hand  over  the  possession  of  the

property to the revenue officer for conducting fresh auction for realization of the

arrears of  sales tax.   The appellant  also  filed  Writ Petition No.27302 of  2003 for

restraining the revenue officer from taking action against  the auctioned property.

During the pendency of the writ petition, the company was wound up.  By an order

dated 10.11.2004, the Division Bench of the High Court disposed of Writ Petition

Nos.26523 of 2003 and 27302 of 2003 along with Writ Appeal Nos.1165 of 2003 and

1230 of 2003 filed by the company and licensee against dismissal of the writ petitions

filed by them challenging the sale conducted by the recovery officer of the Tribunal.

The Division Bench referred to Section 26B of  the Kerala Act,  judgments of  this

Court  in  State  Bank  of  Bikaner  and  Jaipur  v.  National  Iron  and  Steel  Rolling

Corporation and others (supra) and State of M.P. v. State Bank of Indore (supra)

and held that the sale conducted by the recovery officer of the Tribunal  is  illegal

because no notice was given to the revenue officers despite the fact that the property

which  was  subjected  to  auction  had already  been attached.   The  Division  Bench

further held that the State was entitled to enforce the first charge on the property of

the company by conducting fresh auction.  The Review Petition filed by the appellant

was dismissed by another Division Bench by recording the following observations:-

“We  have  already  found  that  the  various  provisions  of  the Recovery of  Debts due to Banks and Financial  Institutions Act, 1993  would  not  affect  the  statutory  charge  of  the  State Government.  Therefore the contention raised on the basis of the Second  Schedule  to  the  Income  Tax  Act,  1961  need  not  be examined.  Since we have already found that State Government stands outside the purview of the DRT Act and that the State need not stand in the queue for claiming priority, the contention of the counsel for the review Petitioners that the sale effected by State is vitiated cannot be sustained.

We therefore find no  reason to accept  the contention raised by senior counsel.  We also find no substance in the arguments raised by the counsel for the Canara Bank.  Contentions raised by the counsel are only to disturb the substantial right of the State which has already been recognized by the Division Bench holding that they  have  got  first  charge  and  the  State  can  adopt  its  own procedure  for  enforcing  the  statutory  charge.   Procedural provision pointed out by the counsel have no relevance while the State is enforcing the statutory charge.  Regarding the contention raised by senior counsel Sri N.N. Sugunapalan we are of the view, if  any  amount  is  due  towards  employees  provident  fund  those matters could be taken up  before  the State Government.   The power under Section 11(2) would not annul the statutory charge of the State.  Under such circumstance review petitions would stand dismissed.”

Ms. Indu Malhotra, learned counsel for the appellant argued that decree passed by

the Tribunal on 17.2.2000 was prior to the notice for attachment issued by Tehsildar

under Section 36 of the Kerala Revenue Recovery Act and as the sale notice issued by

him was  stayed  by  the  High  Court  on  15.3.2001,  the  bank  did  not  commit  any

illegality by auctioning the first property of the company.  She further argued that

State can recover its dues by auctioning the second property of the company and the

High Court  was not  justified in nullifying the auction conducted by the recovery

officer of the Tribunal.  Learned counsel appearing for the bank argued that since

the State was not a party before the Tribunal, it was not necessary to give notice to

the Tehsildar.

In our view, the High Court did not commit any illegality by nullifying the auction

conducted  by  the  recovery  officer  of  the  Tribunal,  who,  as  per  admitted  factual

matrix of the case, did not give notice to the revenue officer despite the fact that the

property had been attached under Section 36 of the Kerala Revenue Recovery Act

and the bank had challenged the notice issued under Section 49(2) of that Act in Writ

Petition No.8845 of 2001 and succeeded in persuading the High Court to stay that

notice.

63. C.A. No.4909 of 2006 – Central Bank of India v. The Deputy Tehsildar

and others – The petitioner-bank extended financial facilities to the private

respondents, who mortgaged immovable properties for securing repayment.  In 1994,

the bank filed suits for recovery of its dues.  On establishment of the bench of the

Tribunal at Ernakulam, all the suits were transferred to the Tribunal which passed

decree dated 31.3.2000 in T.A. No.1032/1997,  25.7.2001 in  T.A.  No.1009/1997 and

9.8.2001  in  T.A.  No.1015/1997.   The  bank  also  issued  recovery  certificate  dated

1.12.2003.  However, before the bank could execute the decrees, Tehsildar (Revenue

Recovery), Kollam, initiated proceedings under the Kerala Revenue Recovery Act for

sale of the mortgaged properties which was attached for recovery of the arrears of

sales  tax.   The  petitioner challenged the  sale  notices  issued  by  Tehsildar  in  Writ

Petition No.13425 of 2004.  The learned Single Judge by relying on the judgment of

this Court in Dena Bank v. Bhikabhai Prabhudas Parekh & Co. (supra) and of the

Division Bench of the High Court in Sherry Jacob v. Canara Bank [2004 (30) KLT

1089] dismissed the writ petition.  The Division Bench dismissed the writ appeal.

In our opinion, the High Court rightly held that the Tehsildar was entitled to give

effect to the primacy of statutory first charge created on the property of the dealer

under Section 26B of the Kerala Act.

64. C.A.  No.1288  of  2007  –  UCO  Bank  v.  State  of  Kerala  &  others –

Respondent No.4, M/s. International Trade Links took loan from the appellant-bank

but failed to repay the same.  The appellant issued notice under Section 13(2) of the

Securitisation Act and approached Tehsildar (Revenue Recovery) Kanayannur for

rendering  assistance  to  take  possession  of  the  mortgaged  property.   The  latter

declined the appellant’s request on the ground that action has already been initiated

under the Kerala Revenue Recovery Act for recovery of sales tax under the Kerala

Act.   Thereupon,  the appellant  filed  Writ Petition No.4198 of  2005 for issue of  a

direction to the District Collector, Ernakulam and Tehsildar,  Kanayannur to take

vacant possession of the mortgaged property.  It also prayed that Section 26A and

26B of the Kerala Act be declared unconstitutional and void being inconsistent with

the provisions  of  the Securitisation Act.   By an order dated 7.2.2005, the learned

Single Judge directed the Tehsildar  to sell  mortgaged property and to permit the

bank to coordinate in the sale.  That order was modified on 22.9.2005 and the bank

was allowed to sell the property subject to certain conditions.  The bank applied for

modification of order dated 22.9.2005 and prayed that it may be permitted to retain

the money realized from sale of the mortgaged property.  The learned Single Judge

did not entertain the appellant’s prayer but directed that if the sale price is lower

than the one mentioned by the government pleader then the sale shall be confirmed

only  after  getting  further  order  from  the  court.   Liberty  was  also  given  to  the

borrower/guarantor  to pay the arrears.   Writ  appeal  filed  by  the appellant-bank

against the interim order was disposed of by the Division Bench with the following

observations:-

“Since the revenue authorities have already attached the property this court will not be justified in directing respondents 2 and 3 to hand over possession of the property to the Bank.  All the same it is  entirely  for  the  State  and  its  officers  to  decide  whether possession should be handed over to the Bank for taking further proceedings under the Securitisation Act.  We leave it to the State to take a decision in this matter in accordance with law.  Needless to say, since State has got prior charge it is open to the State to proceed in accordance with law.  Let a decision be taken by the district Collector within one month from the date of receipt of a copy  of  this  judgment.   The  appeal  and  the  writ  petition  are disposed  of  as  above.   I.A.  No.14420  of  2005  would  stand dismissed.”

Since we have already expressed the view that in terms of Section 26B of the Kerala

Act, the State has got prior charge over the property of the dealer and the facts of the

case show that the revenue authorities had already attached the property, there is no

valid ground to interfere with the order passed by the Division Bench.

65. C.A. No.1318 of 2009 [arising out of S.L.P. (C) No.24767 of 2005] – The

South Indian Bank Ltd., Trichur -1 v. State of Kerala & others – In  the

year 1984, the appellant-bank granted loan to respondent nos.3 to 5, who mortgaged

their immovable properties as security for repayment.  After 8 years, the bank filed

O.S.  No.720 of  1992 for  recovery of  amount  of  loan  with  interest.   The  suit  was

decreed on 30.1.1995 for a sum of Rs.3,51,36,973/-.  After lapse of three years, the

bank filed O.A. No.1081 of 1998 for recovery of the amount in terms of decree dated

30.1.1995.  On 26.7.2000, the Tribunal issued recovery certificate in favour of bank.

In  the  meanwhile,  Tehsildar,  Ottapalam issued  notice  under  Section  49(2)  of  the

Kerala Revenue Recovery Act on 2.6.1999 for sale of the mortgaged properties for

recovery of sales tax dues amounting to Rs.85,45,276/-.  The appellant challenged the

proposed sale in Writ Petition (O.P. No.17701 of 1999) and prayed that the State and

its functionaries may be restrained from selling the property.  The learned Single

Judge, after noticing the judgment of this Court in State of M.P. v. State Bank of

Indore [(2002) 10 KTR 366 (SC)] held that even if there is first charge in favour of

the bank, the same will not adversely affect the statutory first charge of the State.

Accordingly,  he  refused  to  interfere  with  the  proposed  sale  of  the  mortgaged

properties but gave liberty to the bank to proceed to execute the decree passed in its

favour in accordance with law.  Writ appeal filed by the bank was dismissed by the

Division Bench making observations which have been extracted hereinabove.   

66. We are in complete agreement with the Division Bench that statutory first

charge  created  in  favour  of  the  State  under  Section  26B  of  the  Kerala  Act  has

primacy over the right of the bank to recover its dues.

67. In the result, the appeals are dismissed.  However, it is made clear that this

judgment shall not preclude the banks from realising their dues by taking recourse to

other proceedings, as may be permissible under law.  The appellant in Civil Appeal

No.4174 of 2006 shall be free to avail appropriate remedy for refund of the amount

deposited by him in furtherance of the auction conducted by the recovery officer.

......................J.       [B.N. AGRAWAL]

......................J.       [G.S. SINGHVI]

......................J.       [AFTAB ALAM]

New Delhi, February 27, 2009.