The Bombay High Court has held that mere attachment without mandatory proclamation under the MLR Code and MRLR Rules, coupled with non-registration with CERSAI, strips the State of priority over a secured creditor’s dues under Section 26E of the SARFAESI Act. The Court reaffirmed that under Section 26E of the SARFAESI Act, a secured creditor’s dues enjoy priority over all government dues, including arrears of land revenue, taxes, cesses and rates payable to the State or local authority.
The Court also clarified that the State authorities cannot claim priority over a secured creditor merely by attaching the defaulter’s property. A valid attachment must be followed by due proclamation in the manner prescribed under the MLR Code, 1966 and the MRLR Rules, 1967, including beating of drum, affixation on a conspicuous part of the property, and display on the Talathi’s notice board. Accordingly, non-registration of the State’s claim or attachment order with CERSAI attracts the consequences under Section 26C(2) of the SARFAESI Act and weakens the State’s claim of priority over the secured creditor.
The High Court also held that an auction conducted by the Tahsildar for recovery of government dues during the subsistence of SARFAESI enforcement measures, and after symbolic possession had already been taken under Section 13(4), is liable to be quashed as not in conformity with the SARFAESI Act. The fact that the land was purchased by the Talathi on behalf of the State Government for a nominal price, did not create any valid title in favour of the State, and the consequential mutation entry recording the State as occupant was directed to be deleted within four weeks.
The Division Bench comprising Justice Manish Pitale and Justice Shreeram V. Shirsat noted that the auction conducted by the Tahsildar on 7 April 2018 took place during the subsistence of SARFAESI enforcement measures initiated by the bank, and even after the bank had taken symbolic possession under Section 13(4) on 20 December 2012. The Court further observed that the panchanama dated 8 February 2013, relied upon by the Tahsildar, did not even describe the property bearing old Survey No. 46/1/2 as having been attached.
The affidavit-in-reply filed by Respondent No. 3 was conspicuously silent on whether any CERSAI registration had been made by the State authorities, and also did not indicate that any proclamation of attachment had been carried out in the manner required by law, such as by beating of drum, affixation on a conspicuous part of the property, or display on the Talathi’s notice board, as mandated under the MLR Code, 1966 and the MRLR Rules, 1967. The Court therefore found that the State authorities had merely attached the property without following up with the mandatory proclamation steps.
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Briefly, Indian Overseas Bank (IOB), the petitioner, is a secured creditor that had sanctioned financial facilities to Respondent No. 5 (the borrower) in 2007, secured by way of equitable mortgage through deposit of original title deeds of an immovable property. The charge was registered with the Registrar of Companies on 31 January 2007. The borrower defaulted, and the account was classified as a Non-Performing Asset (NPA) on 31 December 2010. The bank then initiated recovery proceedings under the SARFAESI Act, 2002, issuing a Section 13(2) notice on 28 September 2012 and a Section 13(4) possession notice on 20 December 2012.
The bank auctioned the mortgaged property on 26 November 2021 in favour of M/s. Kaushal Metal and Steel Pvt Ltd. and M/s. TGK Special Steel Pvt Ltd., and a sale certificate was issued on 22 February 2022. However, the bank could not hand over physical possession of one parcel, because the survey number in the Talathi’s records differed from the original title deeds. Investigation revealed that the old Survey had been renumbered, and that the Tahsildar, Khalapur (Respondent No. 3) had auctioned the same land on 7 April 2018 for recovery of government dues of Rs. 2.68 crores, owed by the borrower to the District Industries Centre (Respondent No. 2).
Since no bids were received, the Talathi purchased the land on behalf of the Government of Maharashtra for a nominal price, and Mutation Entry No. 1959 dated 16 April 2018 was recorded in the name of the State Government. The bank therefore approached the Bombay High Court seeking to quash the 2018 auction and restore possession.
