By TIOL News Service

ALLAHABAD, AUG 13, 2014: THE respondent company is incorporated under the Companies Act, 1956 and is engaged in the manufacture and sale of steel. The company had availed credit facilities aggregating Rs.525 lacs from the petitioner's bank. The credit facilities were in relation to stock, cash credit, term loan, etc. For the aforesaid purposes, respondent had executed agreement for loan and an agreement for hypothecation of goods and assets. The machineries were also placed in favour of the petitioner bank and a deed of guarantee was also executed in favour of the petitioner bank. From the documents so executed the land, building, fixed assets have been mortgaged/charged/hypothecated with the petitioner bank for the purpose of availing credit facilities.

The company defaulted in the payment of the loan amount and, accordingly, the petitioner initiated recovery proceedings under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Thereafter, the petitioner filed Original Application before the Debts Recovery Tribunal, Allahabad for recovery of Rs.9.26 crores together with pendent lite and future interest, which is pending consideration.

It transpires that the Central Excise department initiated proceedings against the respondent company for recovery of excise duties under Section 142 of the Customs Act, 1962 and under the Attachment of Property of Defaulters for Recovery of Government Dues Rules, 1995 and the property of respondent company has been attached under Section 142 of the Customs Act, 1962. Based on the said attachment order, the Assistant Commissioner, Central Excise, Allahabad intimated the petitioner-bank that in view of Section 11 of the Central Excise Act, 1944 empowering the department to recover government dues, the land, plant and machinery and also any property in the name of respondent company should not be brought/sold/leased/transferred by the petitioner without the permission of the Assistant Commissioner of Central Excise, Division Allahabad.

The petitioner bank is aggrieved by this restraint order issued by the Assistant Commissioner, Central Excise, Allahabad and has filed the present writ petition for its quashing.

It was submitted by the banker that the petitioner, being the secured creditor, has the first charge over the property and that there is no statutory provision under the Central Excise Act giving priority to the excise department to recover government dues over the debts owed to the petitioner bank; that the respondent CE department has no authority of law to restrain the petitioner from not recovering its dues.

The Counsel for the Central Excise department submitted that the CE dues were prior in point of time to the loan granted by the petitioner-bank and since pursuant to the demand raised by them, the property has been attached, consequently, the Central Excise department had the first right to recover the amount.

The High Court observed that the Crown's preferential right to recover its debts over other creditors is confined to ordinary or unsecured creditors and that the Crown's debts does not override the right of a secured creditor unless there is a statute to the contrary. Citing the decisions of the Supreme Court in   Dena Bank Vs. BhikhabhaiPrabhudas Parekh & Co., 2000 (5) SCC 694,   State Bank of India Vs. State of U.P. and another, 2003 (1) UPLBEC 328 , The Bank of Bihar Vs. State of Bihar and others, 2002-TIOL-978-SC-MISC, UTI Bank Ltd. Vs. Deputy Commissioner of Central Excise, Chennai-II, 2006-TIOL-404-HC-MAD-CX-LB, Rana Girders Ltd. Vs. Union of India and others, 2013-TIOL-39-SC-CX,  it was concluded that being a secured creditor under Section 2(zd) of the said SARFAESI Act the petitioner bank had priority in respect of its dues over the recovery of the dues of the Central Excise department; that the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 clearly provided a provision for recovery of the amount to a secured creditor, who had the first charge.

The High Court further observed -

++ Section 11 of the Central Excise Act and Section 142 of the Customs Act, 1962 only provides for recovery of sums due to the government. We do not find that these provisions indicate that the Central Excise department has any preferential charge. The learned counsel for the Central Excise department has failed to show any provision by which government dues could be recovered as the first charge. In the light of the aforesaid, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, being a special enactment and the petitioner being a secured creditor had the first charge to recover the amount.

Holding that the CE department had no authority of law to restrain the petitioner-bank from proceeding with the recovery of the amount from the assets of the respondent company over which the petitioner had the first charge, the order passed by the department was held to be unsustainable &quashed.

The writ petition was allowed.

In passing: Would mention of section 11E. (Liability under Act to be first charge) inserted by the Finance Act, 2011 made any difference?

Also read First Charge for Customs, Excise and Service Tax Dues .

(See 2014-TIOL-1355-HC-ALL-CX)