A secured creditor’s SARFAESI priority prevails over government dues absent lawful attachment proclamation and CERSAI registration.

The petitioner, Indian Overseas Bank, had sanctioned financial facilities to Respondent No. 5 in 2007, secured by an equitable mortgage of immovable property. The security interest was registered with the Registrar of Companies, and the borrower’s account was classified as an NPA on 31 December 2010. The Bank initiated measures under Sections 13(2) and 13(4) of the SARFAESI Act, including possession proceedings in respect of the mortgaged property.

The Bank subsequently auctioned the secured property to M/s. Kaushal Metal and Steel Private Limited and M/s. TGK Special Steel Private Limited on 26 November 2021 and issued a sale certificate on 22 February 2022. However, while completing the transfer, it discovered that the property described in the original title deeds as Old Survey No. 46/1/2 corresponded to New Survey No. 43/1/B in the revenue records.

Meanwhile, the State authorities had sought recovery of Respondent No. 5’s alleged government dues of Rs. 2,68,99,000/- under the Maharashtra Land Revenue Code, 1966 and the Maharashtra Realisation of Land Revenue Rules, 1967. The property was allegedly seized and an encumbrance was recorded in the “other rights” column of the 7/12 extract. On 7 April 2018, the property was auctioned; since no outside bidders participated, the Government purchased it through its officials for Re. 1/- and the Government’s name was subsequently entered in the revenue record.

The Bank challenged the auction sale and the consequential mutation, contending that its secured creditor’s priority under Section 26E of the SARFAESI Act prevailed over the State’s claim. It also contended that the State had not complied with the statutory requirements for a valid attachment and proclamation of sale.

Whether the State authorities’ auction sale of Survey No. 43/1/B on 7 April 2018, in recovery of government dues, was valid despite the petitioner Bank’s prior mortgage and SARFAESI enforcement measures.

Whether the petitioner Bank’s secured debt had priority over the State’s recovery claim under Section 26E of the SARFAESI Act.

Whether mere attachment and recording of an encumbrance, without a legally compliant proclamation of attachment and sale, was sufficient to defeat the secured creditor’s priority.

Whether the Government’s auction purchase and consequential Mutation Entry No. 1959 were liable to be quashed and deleted.

The Court applied Sections 13(2), 13(4), 26E, 26B(4) and 26C(2) of the SARFAESI Act, 2002, holding that a secured creditor’s dues have priority over all other debts, including government revenues, taxes, cesses and rates, subject to the statutory framework concerning registration and prior attachment.

It relied on the Full Bench decision in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax, which held that priority under Section 26E ordinarily prevails unless the State establishes a valid attachment and proclamation made in accordance with the Maharashtra Land Revenue Code and the Maharashtra Realisation of Land Revenue Rules before the relevant statutory priority regime came into force.

Under the applicable provisions of the Maharashtra Land Revenue Code and the 1967 Rules, mere attachment is insufficient; the attachment and proposed sale must be duly proclaimed through the prescribed modes, including public notice, beating of drum or other customary methods, and affixture where required.

Non-registration of the State’s claim or attachment with CERSAI, coupled with registration of the secured creditor’s security interest, further subordinates the State’s claim under Sections 26B and 26C of the SARFAESI Act.

The Court found that the State’s affidavit did not establish any CERSAI registration of its claim or attachment.

It also did not demonstrate that, after the alleged attachment, the statutory proclamation requirements had been fulfilled by beating of drum, affixing notice on the property or the Talathi office, or adopting other prescribed modes of public notice.

Thus, the State had done no more than record an attachment and encumbrance, which was legally insufficient to confer priority over the Bank’s secured claim.

Applying Jalgaon Janta Sahakari Bank, the Court held that the Bank’s security interest and SARFAESI proceedings prevailed, and that the State’s alleged charge could not defeat the Bank’s priority under Section 26E.

The Court clarified, however, that the State remained entitled to recover its dues in accordance with law from other assets or from any surplus remaining after satisfaction of the Bank’s dues.

The auction sale conducted by Respondent Nos. 3 and 4 on 7 April 2018 in respect of Survey No. 43/1/B was quashed and the transfer of the property to the Government was declared null and void.

The authorities were directed to restore control and possession of the property, corresponding to Old Survey No. 46/1/2, in favour of the petitioner Bank and to delete Mutation Entry No. 1959 dated 16 April 2018 within four weeks.

The Bank’s secured dues were held to have priority over the State’s claim, and the Bank’s auction purchasers were held entitled to clear title free from the encumbrances claimed by Respondent Nos. 2 to 4, subject to statutory compliance under the SARFAESI Act.

The State authorities retained liberty to recover their dues in accordance with law from other assets or from any surplus sale proceeds remaining after the Bank’s dues were satisfied.