Priority of Secured Creditor Over State Revenue Dues Under SARFAESI: Bombay High Court Ruling

1. Background of the Dispute

The Bombay High Court, in Indian Overseas Bank Vs State of Maharashtra and Others (Bombay High Court), examined a conflict between:

  • A secured creditor (Indian Overseas Bank) enforcing its security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002), and
  • State authorities seeking to recover amounts as arrears of land revenue under the Maharashtra Land Revenue Code, 1966 and the Maharashtra Realisation of Land Revenue Rules, 1967.

The dispute centered on land bearing Old Survey No. 46/1/2 (new Survey No. 43/1/B), which had been:

  • Mortgaged to the petitioner Bank, and
  • Subsequently auctioned by the Tahsildar on 7 April 2018, resulting in a transfer in favour of the Government of Maharashtra for Re. 1/- when no private bids were received.

The Bank challenged this auction and sought restoration of control and possession of the said land as a secured asset, asserting that its charge as a secured creditor had priority over State dues.

2. Key Facts and Chronology

2.1 Sanction of Facilities and Creation of Security

  • In 2007, Indian Overseas Bank sanctioned financial facilities to respondent No. 5 (the borrower).
  • Security was created through equitable mortgage by deposit of title deeds of immovable property, including the subject land.
  • The Bank’s charge was duly registered with the Registrar of Companies on 31 January 2007, providing public notice of the security interest.

2.2 Classification as NPA and SARFAESI Measures

  • The borrower defaulted, and the account was classified as NPA on 31 December 2010.
  • The Bank invoked the SARFAESI Act, 2002 and:
    • Issued a notice under Section 13(2) on 28 September 2012.
    • Issued a possession notice under Section 13(4) on 20 December 2012, thereby taking possession of the secured asset under SARFAESI.

Subsequently, the Bank proceeded to realize its security by auction sale.

2.3 Bank’s Auction and Partial Handover

  • The secured properties, including the subject land, were auctioned in favour of:
    • M/s. Kaushal Metal and Steel Private Limited, and
    • M/s. TGK Special Steel Private Limited
      on 26 November 2021.
  • A sale certificate was issued on 22 February 2022, and possession of the land was handed over to the auction purchasers.
  • However, the Bank was unable to give effective control over the portion corresponding to Survey No. 43/1/B due to conflicting entries in the revenue records.

2.4 Discovery of Mutation and State Auction

Upon verification at the Talathi office:

  • The Bank discovered that Old Survey No. 46/1/2 had been renumbered as Survey No. 43/1/B.
  • It also found that:
    • An encumbrance was recorded in favour of respondent No. 2 (District Industries Centre, Raigad) for Rs. 2,68,99,000/-, and
    • The name of respondent No. 5 (borrower) had been replaced by the Government of Maharashtra in the 7/12 extract by Mutation Entry No. 1959 dated 16 April 2018.

This mutation followed an auction conducted by the Tahsildar (respondent No. 3) on 7 April 2018 for recovery of Rs. 2,68,99,000/- as arrears of land revenue.

Since no bids were received in the auction:

  • The Talathi, acting on behalf of the State, purchased the property for Re. 1/-,
  • A purchase certificate dated 7 April 2018 was issued to the Government of Maharashtra under Rule 14-B of the Maharashtra Realisation of Land Revenue Rules, 1967, and
  • The Government’s name was recorded in the occupant’s column of the relevant 7/12 extract.

3. State’s Version and Proceedings Under Land Revenue Law

3.1 Initiation of Recovery as Arrears of Land Revenue

In the affidavit of respondent No. 3 (Tahsildar, Khalapur), it was stated that:

  • Respondent No. 2 (District Industries Centre) wrote to the Collector, Raigad on 23 October 2012, requesting recovery of Rs. 2,68,99,000/- from the borrower as Government dues.
  • The Collector, Raigad, by letter dated 3 November 2012, directed respondent No. 3 to recover the said dues as arrears of land revenue.

3.2 Steps of Attachment and Encumbrance

According to the respondent:

  • On 16 November 2012, the Tahsildar instructed the Talathi to serve notice on the borrower.
  • Upon non-payment, by letter dated 8 February 2013, the Circle Officer, Vavoshi was directed to:
    • Seize the borrower’s properties under Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967, and
    • Enter an encumbrance of Rs. 2,68,99,000/- in the “other rights” column of the 7/12 extracts.

The Circle Officer reportedly: