Crown Debts (Unsecured Loans) versus Secured debts

PJ/Case Laws/2011-12/1330

Case: UNION OF INDIA LTD v/s SICOM LTD

Citation: 2008-TIOL-225-SC-CX

Issue:- Whether realization of duty under the Central Excise Act will have priority over secured debts in terms of the State Financial Corporation Act, 1951?

Brief Facts:- Respondent No.2 borrowed a sum of Rs.51,00,000/- from First Respondent by an Indenture of Mortgage executed on 22.12.1986. Indisputably, the mortgage created under the said document is governed by the provisions of the State Financial Corporation Act, 1951. It also owed a sum of Rs.19,00,000/- by way of Central Excise duty for the period April 1983 to May 1988. Assessment of central excise duty for the said sum was confirmed.

The Government has extended the provisions of Sections 27, 29, 30, 31, 32A to 32F, 41 and 41A of the Act of 1951 in favour of the respondent by the Government of India in exercise of its power conferred upon it under sub-section (1) of Section 46 of the said Act by issuing an appropriate notification.

Respondent No.2 committed defaults in repayment of the principal amount of loan and also the interest accrued thereon. The first respondent invoked Section 29 of the 1951 Act by issuing notice to take possession of the said securities. Actual physical possession of the mortgaged assets was taken over. Respondent No.2, however, continued to commit defaults as a result whereof the first respondent recalled the entire amount of loan wherefore a notice dated 19th March, 1996 was served.

Respondent No.2 owed a sum of Rs.48,08,242/- to the Appellant i.e. Revenue Department. Appellant expressed its intention to attach and seize its properties. First Respondent, however, by its letter dated 11.11.1996 informed them that they had the first charge of the said properties which are mortgaged in their favour. Despite the same, the appellant expressed intention to proceed to recover the amount from the said properties. First Respondent, by its letters dated 21.7.2000 and 22.8.2000 followed by a lawyer's notice, called upon the appellants to desist from taking any action against their securities and to remove their seal, if any, from the properties of the borrower. As the appellant did not respond thereto, a writ petition was filed.

High Court considered a large number of decisions and held that despite the fact that the dues of excise department were recoverable as land revenue in terms of Rule 213 (2) of the Central Excise Rules read with Section 32 (g) and Section 151 of the Maharashtra Land Revenue Code, 1966, the same by itself would not mean that a first charge of the appellant would give way thereto. It was held that though the arrears of revenue which will be treated as arrears of land revenue will have paramount charge on the land or part thereof but the other claims of State Government which are secured loans will have priority over all unsecured claims against any land of holder. It was held that “In case of secured loan of the Government and other creditors, priority will depend upon precedence of such loan, it is thus clear that security of the Corporation being prior in point of time, it being in the nature of mortgage of priority, the dues claimed by Corporation will have priority over the dues of Customs”.

Aggrieved by the judgment of the High Court, Revenue filed appeal before the Supreme Court.

Appellant’s Contention:- Revenue contended that the crown debt and, in particular, arrears of tax will have a priority over all other. Revenue placed strong reliance in this behalf upon decision of this Court in Macson Marbles Pvt. Ltd. v. Union of India [2003 (158) ELT 424 (SC)].

Strong reliance was also placed on Union of India v/s Somasundaram Mills (P) Ltd & Anr [(1982) 2 SCC 40)] with regard to Section 73 (2) and (3) of Code of Civil Procedure held that debts due to the State are entitled to priority over all other debts.

Respondent’s Contention:- First Respondent argued that principle that a crown debt prevails over other debts is confined only to the unsecured ones as secured debts will always prevail over a crown debt. They drew attention to the non obstante clause contained in Section 56 of the 1951 Act. It was furthermore contended that for the self-same reason Section 529A in the Companies Act was inserted in terms by way of special provisions creating charge over the property and some of the State Governments also amended their Sales Tax Laws incorporating such a provision. The Central Government also with that view amended the Employees Provident Fund and (Miscellaneous) Provisions Act, 1952 and Employees State Insurance Act, 1948.

Reasoning of Judgment:- The Supreme Court held that generally, the rights of the crown to recover the debt would prevail over the right of a subject. Crown debt means the debts due to the State or the king; debts which a prerogative entitles the Crown to claim priority for before all other creditors. Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof.

Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India, are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one. It is trite that when a Parliament or State Legislature makes an enactment, the same would prevail over the common law.

Thus, the common law principle which was existing on the date of coming into force of the Constitution of India must yield to a statutory provision.

The Supreme Court examined the judgments given in M/s Builders Supply Corporation v/s Union of India & Ors [AIR 1965 SC 1061], Bank of Bihar v.s State of Bihar & Ors [AIR 1971 SC 1210], Dena Bank v/s Bhikhabhai Prabhudas Parekh * Co. & Ors [(2000) 5 SCC 694], Sitani Textiles & Fabrics (P) Ltd v/s Asstt. Commissioner of Customs & Central Excise Hyderabad-I [1999 (106) ELT 296 (AP)], Bank of India v/s Siriguppa Sugars & Chemicals Ltd [(2007) 8 SCC 353], State Bank of Bikaner & Jaipur v/s National Iron & Steel Rolling Corporation & Ors [(1995) 2 SCC 19], ICICI Bank Ltd v/s Secretary, Ministry of Commerce [2005 (187) ELT 12 (Kar)].

The Supreme Court held that this court in the case of Union of India v/s Somasundaram Mills (P) Ltd & Anr were dealing with conflict of interest between a secured creditor and an unsecured creditor and not with the question of law involved in the present case.

With regard to judgment of Macson Marbles Pvt Ltd relied upon by appellant-revenue, it was held that the issue being dues under Central Excise Act were held recoverable from an auction purchaser, the said judgment was delivered on the facts of that case and the issue in this appeal was not directly involved. Also, the binding precedent of Dena Bank was also not noticed.

The Supreme Court perused the provisions of Section 11 of the Central Excise Act, 1944 and held that a bare perusal of the same clearly showed that the right to recover must start with sale of excisable goods. It is only when the dues of Central Excise Department are not satisfied by sale of such excisable goods, proceedings may be initiated to recover the dues as land revenue.

The Supreme Court noted that in the judgment given in Suburban ply & Panels Pvt Ltd v/s Assistant Commissioner of Central Excise & Customs, BBSR [2002 (144) ELT 257 (Ori)] by the Division bench of the High Court did not notice the judgment in Dena Bank and other decisions.

The Right of a State Financial Corporation is a statutory right.

In the end, it was held that the non-obstante clause contained in Section 46B of the State Financial Act will prevail over the contract as well as on other laws. {Periyar & PareekanniRubber Ltd v/s Stateof Kerala [2008 (4) SCALE 125]}.

Decision:- Appeal dismissed accordingly.

Comment:- This is a very important decision which will bring great relief to banks and financial institution. They are normally secured debtors and their right will prevail over the right to crown.

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PJ/Case Laws/2011-12/1330

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