The Madras High Court has ruled that a secured creditor cannot seek removal of statutory attachments from the encumbrance certificate without the auction purchaser first depositing dues towards known encumbrances under Rule 9(7) of the Security Interest (Enforcement) Rules, 2002. The Court clarified that a sale certificate issued under the SARFAESI Act disclosing known encumbrances does not entitle the bank or the auction purchaser to seek removal of those encumbrances from the encumbrance certificate without first settling the underlying statutory dues.
The Court further held that Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 grant priority to secured creditors over government dues but do not override the mandatory procedural framework of Rules 9(6) to 9(10). Also, an attachment effected by the revenue department under Section 11E of the Central Excise Act qualifies as an ‘encumbrance’ within the meaning of Section 100 of the Transfer of Property Act, 1882, restricting the owner’s right of alienation.
A secured creditor is not functus officio merely upon issuance and registration of the sale certificate, so long as its recovery proceedings before the Debts Recovery Tribunal remain pending and dues remain unrealised, added the Court.
The Division Bench comprising Justice Abdul Quddhose and Justice R. Rajesh Vivekananthan noted that the auction was conducted strictly on an ‘as is where is’, ‘as is what is’ and ‘whatever there is’ basis, and the terms of sale expressly stipulated that the purchaser had to clear any statutory liability and that the bank assumed no responsibility in that regard. The Bench observed that the sale notice and the sale certificate read with Rule 9(7) of the Security Interest (Enforcement) Rules, 2002 are founded on the principle of caveat venditor, i.e., let the seller beware, obligating the bank to disclose all known encumbrances, while caveat emptor (buyer beware) simultaneously obligates the purchaser to be vigilant.
The Bench further observed that although Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 grant priority to secured creditors over government dues, taxes and cesses, none of these provisions stipulate that the registration department must remove known encumbrances from the encumbrance certificate once a sale certificate has been issued disclosing them. The Bench also observed that the attachment under Section 11E of the Central Excise Act constitutes an encumbrance within the meaning of Section 100 of the Transfer of Property Act, 1882, as it restricts the owner’s right of alienation.
Briefly, Indian Overseas Bank (IOB), the secured creditor of M/s Hi-Tech Minerals Industries Covai Pvt Ltd. (in liquidation), initiated SARFAESI proceedings against the borrower and auctioned the secured property. M/s. SKM Animal Feeds and Foods India Private Limited (R4) emerged as the auction purchaser. The sale notice and the sale certificate issued by the bank disclosed the ‘known encumbrances’ over the property, which included an attachment marked by the Assistant Commissioner of Central Excise and Service Tax, under Section 11E of the Central Excise Act.
The sale certificate was registered by the Sub-Registrar. The bank filed writ seeking a mandamus to direct R1 to remove the said attachment entry from the encumbrance certificate so that the sale could be reflected as free of that encumbrance. The Single Judge dismissed the writ petition, holding that the auction purchaser, having bought the property with full knowledge of the encumbrances, was bound to discharge them under the caveat emptor principle.
