IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE ANTONY DOMINIC TUESDAY, THE 2ND SEPTEMBER 2008 / 11TH BHADRA 1930 WP(C).No. 20625 of 2008(E) -------------------------------------- PETITIONER: ------------------- S.R. BUILDCON PRIVATE LIMITED, 412, B-8, GDITL TOWER, NETAJI SUBASH PLACE, PITAMPURA, NEW DELHI 110034, REPRESENTED BY ITS DIRECTOR, SUSHIL KUMAR SINGLA, AGED 48 YEARS, S/O.SRI VED PRAKASH, RESIDING AT X204, SIDHARTH APARTMENTS, MP ENCLAVE, PITAMPURA, NEWDELHI-110034. BY ADV. SRI.M.K.DAMODARAN (SR.), SRI.ALAN PAPALI, SRI.ASHIK K.MOHAMMED ALI, SRI.GILBERT GEORGE CORREYA, SMT.DHANYA P.ASHOKAN, SRI.NISHIL.P.S. RESPONDENTS: ----------------------- 1. STATE OF KERALA, REPRESENTED BY THE PRINCIPAL SECRETARY, REVENUE (S) DEPARTMENT, SECRETARIAT, THIRUVANANTHAPURAM. 2. THE DISTRICT COLLECTOR, PALAKKAD. 3. THE TAHSILDAR (RR), PALAKKAD DISTRICT. 4. INDUSTRIAL FINANCIAL CORPORATION OF INDIA LIMITED, DELHI REGIONAL OFFICE, IFCI TOWER, 61, NEHRU PLACE, NEW DELHI- 110019, REPRESENTED BY ITS AUTHORISED OFFICER. 5. KERALA STATE ELECTRICITY BOARD, REPRESENTED BY ITS SECRETARY, VYDHYUTHI BHAVAN, PATTOM P.O., THIRUVANANTHAPURAM. W.P.(C). NO.20625/2008: 6. SPECIAL OFFICER (REVENUE), VYDHUTHI BHAVAN, PATTOM, THIRUVANANTHAPURAM. 7. M/S.HITECH ELECTROTHERMIC AND HYDROPOWER LTD., KONGAMPARA VILLAGE, KOZHIPPARA P.O., PUDUSSERY EAST, PALAKKAD, REPRESENTED BY ITS SENIOR MANAGER. 8. THE CIRCLE OF POLICE, WALAYAR POLICE STATION, PALAKKAD DISTRICT. BY GOVERNMENT PLEADER SRI. K.V. MANOJ KUMAR, ADV. SRI. P. PARAMESWARAN NAIR, ASST. S.G ADV. SRI.L.MOHANAN, ADV. SRI.ABRAHAM THOMAS (PUTHURAN), ADV. SRI.C.K.KARUNAKARAN, SC, KSEB. THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 12/08/2008, THE COURT ON 02/09/2008 DELIVERED THE FOLLOWING: W.P.(C). NO.20625/2008-E: APPENDIX PETITIONERS' EXHIBITS: EXT.P.1: COPY OF THE RELEVANT PORTION OF THE PUBLIC NOTICE PUBLISHED BY THE R.4. IN MALAYALA MANORAMA DAILY DTD. 12/03/2008. EXT.P.2: COPY OF THE LETTER DTD. 09/06/2008 GIVEN BY THE PETITIONER. EXT.P.3: COPY OF THE LETTER DTD. 13/06/2008 ISSUED BY THE R.4. EXT.P.4: COPY OF THE BOARD RESOLUTION OF THE PETITIONER COMPANY. EXT.P.5: COPY OF THE CHEQUE DRAWN ON AXIS BANK LTD., SHALIMAR BAGH, NEW DELHI, GIVEN BY THE PETITIONER COMPANY. EXT.P.6: COPY OF THE LETTER DTD. 24/06/2008 OF THE PETITIONER COMPANY. EXT.P.7: COPY OF THE PAY ORDER DTD. 24/06/2008 OF AXIS BANK LIMITED GIVEN BY THE PETITIONER COMPANY. EXT.P.8: COPY OF THE CONFIRMATION LETTER DTD. 25/06/2008 ISSUED BY THE R.4. EXT.P.9: COPY OF THE CERTIFICATE OF SALE ISSUED BY THE R.4. TO THE PETITIONER COMPANY. EXT.P.10: COPY OF THE SECTION 7 OF REVENUE RECOVERY ACT ISSUED BY THE R.3. EXT.P.11: COPY OF THE SECTION 34 OF REVENUE RECOVERY ACT ISSUED BY THE R.3. EXT.P.12: COPY OF THE FORM 8 OF THE COMPANIES ACT. EXT.P.13: COPY OF THE FORM 13 OF THE COMPANIES ACT. EXT.P.14: COPY OF THE LETTER GIVEN BY THE R.4. TO THE R.8. EXT.P.15: COPY OF THE LETTER DTD. 04/07/2008 GIVEN BY THE PETITIONER. RESPONDENTS' EXHIBITS: EXT.R5.A: COPY OF THE REQUISITION DTD. 27/06/2003 ADDRESSED TO THE R.2. EXT.R5.B: DEMANDS DTD. 30/08/2003 IN FORM NO.10 AND FORM NO.1 WERE ISSUED TO THE R.7. W.P.(C). NO.20625/2008: EXT.R5.C: FURTHER NOTICE DTD. 12/09/2003 WAS ISSUED BY THE R.3. EXT.R5.D: B.O.(FB) NO. 625/2008 (LA III/22247/2003) DTD. 11/03/2008. EXT.R5.E: COPY OF THE LETTER DTD. 10/12/2003 OF THE R.2. //TRUE COPY// P.S. TO JUDGE. prv. ANTONY DOMINIC, J. = = = = = = = = = = = = = = = W.P.(C) No.20625 OF 2008 - E = = = = = = = = = = = = = = = Dated this the 2nd day of September 2008 J U D G M E N T The question that arises for consideration is whether Kerala State Electricity Board (‘KSEB’ for short) has 1st charge over the assets of a consumer, which are mortgaged to a Financial Institution, which is entitled to invoke the provisions of the Securitisation and Reconstruction of Financial Assets Enforcement of Security Interest Act 2002 (hereinafter referred to as the “SARFAESI Act” for short). 2. The 7th respondent, a company incorporated under the provisions of the Companies Act 1956, had by Ext.P13, dated 27th February 1998, hypothecated by a first charge of all the movables, infavour of the 4th respondent and availed of a loan of Rs.9.30 crores. The charge created by Ext.P13, was registered with the Registrar of Companies, Tamil Nadu, as required under Section 125 of the Companies Act. The 7th respondent accordingly set up a Ferro Silicon Manufacturing Unit at Kongampara Village, Kozhippara P.O., Puthussery East, Palakkad, Kerala. 3. The 7th respondent was an Extra High Tension consumer of the KSEB and the installation was energized on 22.10.1998. There were W.P.(C) No.20625/2008 (E) -: 2 :- disputes between the Board and the 7th respondent and one of the issue was the claim of the 7th respondent for supply of energy at the concessional pre-1992 Tariff. Finally the Supreme Court by its judgment dated 17.12.2002 reported in Hitech Electrothermics and Hydropower Ltd., vs. State of Kerala and Others (2003 (2) SCC 716), settled the dispute and directed that the benefit of Pre-1992 tariff be given to the 7th respondent for 3 years, for the period from 22.10.1998 to 21.10.2001. 4. Since the 7th respondent was in default since January 1999, Ext.R5(a) revenue recovery requisition was issued by the Board on 27.06.2003 for the realization of Rs.91,79,29,940/-. In pursuance thereof, Ext.R5(b) demand notice was issued to the 7th respondent on 30.08.2003 and Ext.R5(c) notice was also issued on 12.09.2003. In paragraph 6 of the counter affidavit filed by the 3rd respondent, it is stated that in pursuance to the aforesaid demands, the properties of the 7th respondent were attached on 29.09.2003 and notice of sale was also published on 27.10.2003 and the properties were taken into custody. It is stated that by Ext.R5(e) dated 10.12.2003, the 3rd respondent had also permitted dismantling of the machineries. W.P.(C) No.20625/2008 (E) -: 3 :- 5. It is stated in Ext.R5(d) that several other writ petitions filed against the Board were pending before this court challenging the tariff applicable, the revenue recovery proceedings and against invoking bank guarantee and these writ petitions were disposed of by judgment dated 08.11.2005 directing the Secretary of the Board to hear the 7th respondent and pass orders on their claims. Though notices were issued there was no response from the 7th respondent. Finally Ext.R5(d) order was issued on 11.03.2008 declining the claim of the 7th respondent for pre-1992 tariff, for the period beyond 21.10.2001 and directing that revised bills be issued and that the revenue recover proceedings already initiated will continue. It is stated by the 3rd respondent in paragraph 4 of its counter affidavit that on 14.05.2008 the KSEB issued a revised requisition for Rs.86,87,56,132/- and that the revenue recovery continued on that basis and that the attachment effected on 29.09.2003, was remaining in force during the whole period. 6. In the meantime, since the 7th respondent defaulted payments to the 4th respondent, it being a secured creditor having a contractual first charge over the property hypothecated, proceedings under the provisions of the SARFAESI Act were initiated and as notices issued under Section 13 W.P.(C) No.20625/2008 (E) -: 4 :- (2) of the Act were not responded, notice under Section 13(4) of the Act was issued and possession of the secured assets was taken over on 22.09.2006. In the counter affidavit of the 4th respondent it is stated that on 8.11.2006, sale notice for the disposal of the secured assets was published and that the offers received were far below the reserve price fixed by them. 7. Ext.P1 dated 12.03.2007 is a notice of sale published by the 4th respondent and long thereafter, by Ext.P2 dated 09.06.2008 petitioner offered to buy the assets notified for sale for Rs.4.55 crores on private treaty basis. The 4th respondent responded to the offer by Ext.P3 dated 13.06.2008 informing that the assets could be sold for Rs.4.60 crores on a private treaty basis. It would appear that this counter offer made was accepted by the Board of Directors of the petitioner as per Ext.P4 Resolution and accordingly the said decision was conveyed to the 4th respondent and Ext.P5 demand draft for Rs.50 lakhs was also given. Thereafter, under cover of Ext.P6 dated 24.06.2008, Ext.P7 pay order for the balance sale consideration of Rs.4.10 crores was also paid. Thereupon the 4th respondent issued Ext.P8 confirming receipt of Exts.P5 and P7 and on 27.06.2008 Ext.P9 sale certificate was issued and according to them, W.P.(C) No.20625/2008 (E) -: 5 :- possession of the secured assets was handed over to the petitioner. 8. According to the petitioner, in pursuance to the sale concluded in their favour, skilled labourers were brought to the site on 29.6.2008 and on 30.06.2008, they started work of dismantling the machineries, when the 3rd respondent came to the site and insisted that the work should be stopped. It is stated that thereafter on 01.07.2008 Exts.P10 and P11 notices under Sections 7 and 34 of the Revenue Recovery Act were issued by the 3rd respondent. Thereupon the 4th respondent made Ext.P14 complaint to the police and the petitioner also addressed Ext.P15 to the KSEB. 9. As the petitioner’s requests to permit them to continue the work were not responded, this writ petition was filed on 08.07.2008 praying for quashing Exts.P10 and P11 revenue recovery notices attaching the movables, plant, machinery and sheds of the 7th respondent company and for a direction to the 3rd respondent to permit the petitioner to remove the movables from the premises of the 7th respondent company pursuant to Ext.P9 sale certificate issued by the 4th respondent. There is a further prayer to direct the 8th respondent, not to obstruct the petitioner from removing the articles on the strength of Ext.P9. 10. Learned Senior Counsel, Sri. M.K. Damodaran, appearing for W.P.(C) No.20625/2008 (E) -: 6 :- the petitioner, contended that a secured creditor, is entitled to realise its dues by initiating proceedings under the SARFAESI Act against the secured assets. He contended that the charge over the secured assets having been created and registered under Section 125 of the Companies Act, the secured creditor is entitled to first charge over the secured assets. It was argued that the claim of the Board for first charge over the assets of its consumer, is only in terms of the provision contained in clause 15 (d) of the Conditions of Supply of Electrical Energy framed under Section 79(j) of the Electricity (Supply) Act 1948 and that this provision being inconsistent with the provisions of the SARFAESI Act, the provisions of the latter will have overriding effect in view of Section 35 of the SARFAESI Act. Mr. Damodaran placed reliance on the Apex Court judgment in TRANSCORE Vs. Union of India and another (2008 (1) SCC 125), UTI Bank Ltd. vs. Deputy Commissioner of Central Excise and another (2007 (135) Com. Cases 329), A.J. Infrastructures vs. State of H.P and Others (2008 (15) VST 342) and Punjab National Bank vs. Sate of H.P (2008 (15) VST 365). 11. On behalf of the 4th respondent, IFCI, Sri. M. Pathrose Mathai, Sr. Counsel contended that they have first charge over the assets of the 4th W.P.(C) No.20625/2008 (E) -: 7 :- respondent. Relying on the Apex Court judgment in Dena Bank vs. Bhikabhai Prabhudas Parekh and Co., and Others (2000 (5) SCC 694), he contended that the state’s preferential right to recover its debts over other creditors, is confined to ordinary or unsecured creditors. Placing reliance on the Apex Court judgment in Allahabad Bank vs. Canara Bank and another (AIR 2000 SC 1535), the Learned Sr. Counsel contended that clause 15(d) of Conditions of Supply of Electrical Energy is inconsistent with the provisions of the SARFAESI Act and that in such a case, in view of Section 35 of the Act, the same will prevail over the former. 12. It was also contended that clause 15(d) is invalid as it was beyond the regulation framing power conferred on the KSEB, under Section 79 (j) of the Electricity (Supply) Act. Learned Senior Counsel also contended that the Revenue Recovery Act, only provides for a machinery for an expeditious recovery of the dues and that by virtue of the fact that a notification has been issued under Section 71 of the RR Act, making the dues of the Board recoverable under the Revenue Recovery Act, the character of the dues do not change and that no new rights are created. In this context, reliance was placed on the Division Bench judgment of this Court in the case of A.K. Nanu and Others vs. State of Kerala and W.P.(C) No.20625/2008 (E) -: 8 :- Others (1987 (2) KLT 921). 13. Though notice in this writ petition was ordered by special messenger, the notice addressed the 7th respondent was affixed on their premises and the endorsement of the process server is that the firm is not working for the last 5 years. 14. On behalf of the KSEB, Sri. C.K. Karunakaran, Advocate explained the proceedings initiated by the KSEB starting from Ext.R5(a) revenue recovery notice issued on 27.06.2003 and upto, the revised requisition issued on 14.05.2008 for realizing Rs.86,87,56,132/-. According to him, long prior to the 4th respondent initiated proceedings under the SARFAESI Act, the KSEB had initiated proceedings in terms of the provisions contained under Revenue Recovery Act and the Conditions of Supply of Electrical Energy framed under the enabling provisions of the Electricity (Supply) Act. Relying on the judgments of this court in Kurikattil Rubber Industries v. K.S.E.B (1999 (1) KLT 529), Asokan vs. K.S.E.B (2000 (1) KLT 432), Seena B. Kumar vs. Asst. Executive Engineer (2003 (3) KLT 987) and Hyderabad Vanaspathi Ltd., vs. A.P. State Electricity Board and others (1998 (4) SCC 470), it was contended that the Conditions of Supply of Electrical Energy W.P.(C) No.20625/2008 (E) -: 9 :- has been held to be statutory in nature. 15. He argued that in view of clause 15(d) of the Conditions of Supply, all dues to the Board from a consumer shall be the first charge on the assets of the consumer and all dues including penalty shall be realized as public revenue due on land. He contended that by virtue of Ext.P13 hypothecation, though an interest in the assets of the 7th respondent has been created in favour of the 4th respondent, the statutory first charge created by clause 15(d) of the Conditions of Supply, will prevail over the contractual charge created in favour of the 4th respondent. 16. He submitted that the provision of the SARFAESI Act by itself, do not create any first charge over the mortgaged property and that it only provided for an expeditious recovery of the dues of a secured creditor. According to him, in the absence of a statutory first charge in favour of the 4th respondent, there is no inconsistency between the Conditions of Supply and the provisions of the SARFAESI Act and therefore Section 35 of the SARFAESI Act and the judgment in the case of Allahabad Bank, are not relevant. The counsel placed reliance on the judgment of the Bombay High Court in the case of Thane Janata Sahakari Bank Ltd. vs. Commissioner of Sales Tax and Others (2006 (131) Com. Cases W.P.(C) No.20625/2008 (E) -: 10 :- 823) and of this court in Sherry Jacob vs. Canara Bank (2004 (3) KLT 1089) and Bank of India vs. Asst. Provident Fund Commissioner (2006 (2) KLT 553). 17. He also argued that in view of the provisions contained in the Security Interest (Enforcement) Rules, 2002 any sale under the Act, is subject to charge and that the sale in this case by private treaty, was invalid as it was without the participation or involvement of the owner of the property, and also for the reason that it was concluded in undue haste. It was contended that the validity of clause 15(d) of the Conditions of Supply, was not under challenge and therefore the contentions to that effect raised by the 4th respondent, who is not the consumer of the Board, does not merit consideration. 18. The first issue that needs to be answered is regarding the effect of clause 15(d) of the Conditions of Supply of Electrical Energy, on the rights available to a secured creditor under the provisions of the SARFAESI Act. As already noticed, Conditions of Supply of Electrical Energy was framed by the KSEB exercising its power under the Electricity (Supply) Act 1948 which has since been repealed by Indian Electricity Act 2003. Section 79 of the said Act provided that the Board may, by W.P.(C) No.20625/2008 (E) -: 11 :- notification in the Official Gazette, make Regulations not inconsistent with the Act and Rules framed thereunder to provide for all or any of the matters and sub Section (j) provides, the; “principles governing the supply of electricity by the Board to persons other than licencees under Section 49”. 19. Clause 15(d) of the Conditions of Supply being relevant, is extracted below for reference: “All dues to the Board from a consumer shall be the first charge on the assets of the consumer. All dues including penalty shall be realized as public revenue due on land.” 20. The Apex Court in its judgment in Hyderabad Vanaspathi Ltd., v. A.P. State Electricity Board and others (1998 (4) SCC 470) held the conditions of supply to be of statutory character, in the following words: “The Board in performance of a statutory duty supplied energy on certain specific terms and conditions framed in exercise of a statutory power. Undoubtedly the terms and conditions are statutory in character and they cannot be said to be purely contractual”. This court also had occasion to examine the character of the Conditions of Supply framed by the Board in the judgments in Kurikattil Rubber Industries v. K.S.E.B (1999 (1) KLT 529), Asokan vs. K.S.E.B (2000 (1) KLT 432), and Seena B. Kumar vs. Asst. Executive Engineer W.P.(C) No.20625/2008 (E) -: 12 :- (2003 (3) KLT 987) and held the Conditions of Supply to be of statutory character. 21. Once the contention of the Board in this behalf is accepted, the next question is whether the first charge created by clause 15(d) of the Conditions of Supply will override the rights of a secured creditor. The SARFAESI Act came into effect from December 17th, 2002, to empower the Banks and Financial Institutions to take possession of securities and sell them without pursuing the legal remedy provided in the Civil Procedure Code and for that matter, the special remedy provided under the Recovery of Debts Due to Banks and Financial Institutions Act 1993. The necessity of enactment of the SARFAESI Act arose as the legislature found that the legal framework relating to commercial transactions has not kept pace with the changing commercial practices and the reforms in the financial sector. This led to the enactment of the SARFAESI Act, accepting the recommendations of the Narasimhan Committee I and II and the Andhyarujana Committee, constituted by the Central Government. 22. Section 13 of the SARFAESI Act provides for enforcement of security interest by a secured creditor, over riding Section 69 and 69A of the Transfer of Property Act 1882 and empowers the secured creditor to W.P.(C) No.20625/2008 (E) -: 13 :- enforce the security interest in terms of the procedure prescribed therein. Section 35 of the SARFAESI Act being relevant, reads as follows: “The provisions of the Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”. Sections 13 and 35 of the SARFAESI Act have non obstante clauses and Section 35 over rides other laws or instruments in case of inconsistency. 23. The question to be considered is whether clause 15(d) of the Conditions of Supply is inconsistent with the provisions of SARFAESI Act. Clause 15(d) of the Conditions of Supply provides that all dues of the Board from a consumer shall be first charge on the assets of the consumer and is recoverable as public revenue due on land. If the provisions of the SARFAESI Act, do not provide for first charge in respect of the liability due to a secured creditor, there arise no case of inconsistency and the statutory first charge created by clause 15(d) of the conditions of supply shall hold the field. The counsel for respondents 4 and 7 could not show me any provision in the SARFAESI Act creating a first charge in favour of the 4th respondent but was relying on Section 13 of the said Act, which only provides the machinery for realisation of the security without W.P.(C) No.20625/2008 (E) -: 14 :- intervention of the court or tribunal. The said section is a procedural provision for expeditious realization of security interest, by a secured creditor and does not create any charge by itself. In other words it only provides the process for enforcement of a contractual charge created in favour of the secured creditor. I am in full agreement with the law laid down by the Bombay High Court in the case of Thane Janata Sahakari Bank Ltd. (2006 (132) Com. Cases 823). 24. In the context of Section 26(B) of the Kerala General Sales Tax Act, the claim of precedence of state over the claims of a secured creditor was considered by this Court in the judgment in Sherry Jacob vs. Canara Bank (2004 (3) KLT 1089) where it was held that “The statutory first charge will prevail over any charge or right created in favour of a mortgagee/ secured creditor. The statutory first charge gets precedence over an existing mortgage right. The precedence or priority is not confined right of redemption alone.” 25. Again in the context of Section 11(2) of the Employees Provident Fund and Miscellaneous Provisions Act 1952, which provides that if any amount is due from an employer, the amount shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in W.P.(C) No.20625/2008 (E) -: 15 :- force, be paid in priority to all other debts, this court considered the impact of Section 35 of the SARFAESI Act and held as follows: “However, a survey of the provisions of the SARFAESI Act would show that it does not provide for any statutory charge. In the absence of any statutory charge being provided by the SARFAESI Act, the statutory first charge created by Section 11 (2) of the EPF Act gives a clear priority to such charge under the EPF Act or other charges including any right or mode of enforcement available to the Bank under the SARFAESI Act. So much so, the first charge created by the EPF Act has precedence over any right of the Bank under the SARFAESI Act”. 26. Sri. M.K. Damodaran heavily relied on the Madras High Court judgment in the case of UTI Bank (2007 (135) Com. Cases 329) where considering the conflicting claims raised by the Bank and the Central Excise Department, the court held as follows: “In the case on hand, the petitioner-bank which took possession of the property under section 13 of the SARFAESI Act, being a special enactment, undoubtedly is a secured creditor. We have already referred to the provisions of the Central Excise Act and the Customs Act. They envisage procedures to be followed and how the amounts due to the Departments are to be recovered. There is no specific provision either in the Central Excise Act or the Customs Act, claiming first charge as provided in other enactments, which we have pointed out in earlier paragraphs. (emphasis supplied) In the light of the above discussion, we conclude: “(i) Generally, the dues to Government, i.e, tax, duties, W.P.(C) No.20625/2008 (E) -: 16 :- etc., (Crown’s debts) get priority over ordinary debts. (ii) Only when there is a specific provision in the statute claiming ‘first charge’ over the property, the Crown’s debt is entitled to have priority over the claim of others. (iii) Since there is no specific provision claiming ‘first charge’ in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditor, viz., the petitioner-bank. (iv) In the absence of such