Partly allowed

Canara Bank v. the State of Karnataka

Karnataka HC13 Dec 2024WP/1880/2022

Case brief

AI extract

What is this about?

A bank challenged proceedings under the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 and an attachment order affecting properties it held as mortgagee from the borrower. Relying on precedent on secured creditors' priority, the court vacated the attachment over mortgaged properties while allowing the KPID proceedings to continue.

What did the court decide?

Attachment under KPID Act vacated in respect of properties mortgaged to petitioner bank; KPID proceedings otherwise continue; release to bank not granted.

Canara Bank Vs the State of Karnataka — Banking and Recovery | Karnataka HC (2024)

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1 - NC: 2024:KHC:51547 WP No. 1880 of 2022

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 13^TH DAY OF DECEMBER, 2024

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BEFORE

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THE HON'BLE MR JUSTICE SURAJ GOVINDARAJ WRIT PETITION NO. 1880 OF 2022 (GM-RES)

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BETWEEN:

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CANARA BANK, ARM I BRANCH, SPENCER S TOWER, #86, MG ROD, BENGALURU 560 001.

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CANARA BANK, BANGARPET BRANCH, KOLAR ROAD, BANGARPET 563114, KOLAR DISTRICT, REPRESENTED BY, CHIEF MANAGER, ARM-I BRANCH.

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PETITIONERS

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(BY SRI. TP MUTHANNA.,ADVOCATE)

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Digitally signed by SHWETHA RAGHAVENDRA Location: HIGH COURT OF KARNATAKA

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AND:

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THE STATE OF KARNATAKA, REP. BY THE PRINCIPAL SECRETARY, DEPARTMETN OF REVENUE, ROOM NO. 505, 5TH FLOOR, GATE NO.3, MS BUILDING, BANGALORE 560001.

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THE DEPUTY COMMISSIONER AND DISTRICT MAGISTRATE, KOLAR, KOLAR DISTRICT 563101.

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THE ADDL. DEPUTY COMMISSIONER AND

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2 - NC: 2024:KHC:51547 WP No. 1880 of 2022

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THE ADDITIONAL DISTRICT MAGISTGRATE, KOLAR, KOLAR DISTRICT 563101.

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THE CHIEF OFFICER, BANGARPET MUNICIPAL COUNCIL, BANGARPET 563114.

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SREE SHANMUGA MODERN, RICE MILLS PVT LTD, DESIHALLI, KASABA HOBLI, KGF ROD, BANGARPET 563114, KOLAR DISTRICT, REP. BY ITS MANAGING DIRECTOR, R S DILIP KUMAR.

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SRI. R N SHANMUGAM, S/O SRI. R K NARAYANASWAMY, 2770, SUMITRAMMAL NILAYAM, OPP. CANARA BANK, BANGARPET 563114, KOLAR DIST.

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SRI. DILIPKUMAR RS, S/O SRI. RN SHANMUGAM, 2770, SUMITRAMMAL NILAYAM, OPP. CANARA BANK, BANGARPET 563114, KOLAR DIST.

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RESPONDENTS (BY SRI. MAHANTESH SHETTER., FOR R1 TO R3; SRI. AM VIYAY., FOR R4; SRI. HEMANTH R RAO., FOR R5; R6 AND R7 ARE SERVED.)

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THIS W.P. IS FILED UNDER ARTICLES 226 AND 227 OF CONSTITUTION OF INDIA PRAYING TO-QUASH THE ENTIRE PROCEEDINGS INITIATED N PURSUANCE OF THE LETTER DTD 21.12.2019 WRITTEN BY R-1 TO R-2 TO INVOKE THE KARNATAKA PROTECTION OF INTEREST OF DEPOSITORS IN

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3 - NC: 2024:KHC:51547 WP No. 1880 of 2022

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FINANCIAL ESTABLISHMENT ACT, 2004 VIDE ANNX-L AND ETC,.

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THIS PETITION, COMING ON FOR INTERLOCUTORY HEARING, THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

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CORAM: HON'BLE MR JUSTICE SURAJ GOVINDARAJ

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ORAL ORDER

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The petitioners are before this Court seeking for the following reliefs:

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“In view of the above said facts, reasons and relative circumstances of the case, the Petitioner prays that this Hon'ble Court may be pleased to:

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(a) Issue a writ of certiorari, by quashing the entire proceedings initiated in pursuance of the letter dated 21.12.2019 written by Respondent No. 1 to Respondent No. 2 to invoke the Karnataka Protection of interest of Depositors in Financial Establishment Act, 2004 produced as Annexure-L.

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(b) Issue a writ of certiorari, by quashing the consequential order of attachment issued by Respondent No. 3 as per letter No. MIS(R)CR58/201920 dated 01.06.2021 communicated to Respondent No. 4 produced as Annexure- M.

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(c) Issue a direction / mandamus to release the properties mortgaged to the Petitioner Bank as per Annexures-C, H & K to enable the Petitioner to sell the properties and realize their dues.

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(d) Issue any other direction, or order or writ as deemed just in the circumstances and the probabilities of the case and the same may kindly be considered in the interest of justice and equity.”

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The petitioner is a bank who claims to be a secured creditor

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in respect of respondent No.5 who had mortgaged the properties belonging to respondent No.5 in favour of the

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NC: 2024:KHC:51547 WP No. 1880 of 2022

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petitioner – bank as security for the loan advanced by the petitioner - bank. The proceedings under the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (hereinafter referred as to ‘KPID Act’) having been initiated on 21.12.2019 an order of attachment came to be passed by respondent No.3 - Additional Deputy Commissioner of the properties of respondent No.5, on 01.06.2021 at Annexure-M and it is in that background the petitioners are before this Court contending that the petitioners being a secured creditor the properties having been mortgaged in favour of the petitioners, the petitioners right cannot be impugned upon by proceedings initiated under the KPID Act and in this regard reliance is placed on the judgment of a Single Bench of this Court in WP.No.12038/2017 dated 06.07.2022 and the Hon’ble Apex Court in the case of PUNJAB NATIONAL BANK V.S UNION OF INDIA AND OTHERS reported in

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2022 SCC ONLINE SC 227 more particularly para 48 and 50 thereof which are reproduced for easy reference.

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“48. The Bombay High Court in Krishna Lifestyle Technologies Ltd. v. Union of India reported in 2008 SCC Online Bom 137, wherein the issue for consideration was "whether tax dues recoverable under the provisions of

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the Central Excise Act, 1944 have priority of claim over the claim of secured creditors under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 held that: (SCC OnLine Bom paras 19-20)

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"19. Considering the language of Section 35 and the decided case law, in our opinion it would be of no effect, as the provisions of the SARFAESI Act override the provisions of the Central Sales Tax Act and as such the priority given to a secured creditor would override Crown dues or the State dues.

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20. Insofar as the SARFAESI Act is concerned a Full Bench of the Madras High Court in UTI Bank Ltd. v. CCE reported in 2006 SCC Online Mad 1182 (FB) has examined the issue in depth. The Court was pleased to hold that tax dues under the Customs Act and Central Excise Act, do not have priority of claim over the dues of a secured creditor as there is no specific provision either in the Central Excise Act or the Customs Act giving those dues first charge, and that the claims of the secured creditors will prevail over the claims of the State. Considering the law declared by the Supreme Court in the matter of priority of State debts as already discussed and the provision of Section 35 of the SARFAESI Act we are in respectful agreement with the view taken by the Madras High Court in UTI Bank Ltd. v. CCE reported in 2006 SCC Online Mad 1182 (FB).

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50. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the appellant, on Issue 2, hold merit. Evidently, prior to insertion of Section 11-E in the Central Excise Act, 1944 w.e.f. 8-42011, there was no provision in the 1944 Act inter alia, providing for first charge on the property of the assessee or any person under the 1944 Act. Therefore, in the event like in the present case, where the land, building, plant, machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to the provisions contained in Sections 2(1)(zc) to (zf) of the SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI Act, 2002, the Secured Creditor will have a first charge on the secured assets. Moreover, Section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is

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further pertinent to note that even the provisions contained in Section 11-E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.”

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By placing reliance on the aforesaid two judgments it is contended by Sri. TP Muthanna, learned counsel for the petitioners that the security interest credited in favour of the petitioners being prior to the order passed under the KPID Act the rights of the petitioners and security of mortgage cannot be adversely effected.

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The submission of Sri. TP Muthanna, learned counsel for the petitioners is borne out by the aforesaid judgment.

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In that view of the matter, I pass the following:

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ORDER

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i. The writ petition is partly allowed;

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ii. The proceeding under the KPID Act though shall continue the attachment order passed in respect of the properties as regard which the security interest as been created in favor of the petitioner - bank shall stand vacated;

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NC: 2024:KHC:51547 WP No. 1880 of 2022

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iii. The question of any release of the said properties to

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the petitioner - bank would not arise.

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Sd/(SURAJ GOVINDARAJ) JUDGE

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PNV

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