25 Jun 2121

Secured creditor’s interest in a mortgaged property has priority over the dues to be recovered by the revenue authorities under Maharashtra Land Revenue Code, 1966 - Bombay High Court

Case : IDBI Trusteeship Services Limited v. District Collector, Pune and Ors. Writ Petition No. 3417 of 2019

Court : Bombay High Court

Bench : Justice S. J. Kathawalla and Justice Vinay Joshi

Decided on : 25 Jun 2121

Relevant Statues

Article 226 of the Constitution of India, 1950

Section 40 of the Real Estate (Regulation and Development) Act, 2016

Sections 2(19), 149, 169, 181, 182, 192, 193, 194, 195, 208 of the Maharashtra Land Revenue Code, 1966

Rule 3 of the Maharashtra Real Estate (Regulation and Development) (Recovery of Interest, Penalty, Compensation, Fine Payable, Forms of Complaints and Appeal etc.) Rules, 2017

Sections 2(1) (zd), 2(1) (l), 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Section 31-B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993

Section 56 of the Transfer of Property Act, 1882

Brief Facts & Procedure History

1. The relevant seminal facts are that the Petitioner is a leading Indian Trusteeship Company. Under a Debenture Trust Deed dated 16.2.2016, executed by and between Respondent Nos. 4 to 8 and the Petitioner, Respondent No. 4 agreed to issue secured convertible debentures for a sum of Rupees One Hundred and Twenty Crores to the subscribers in order to develop certain immovable properties. The Petitioner is the Debenture Trustee under the Debenture Trust Deed. The Debenture Trust Deed has been registered with the Sub-Registrar of Assurances at Haveli-16 under Registration No. Havl-16/1511/211/2015. Various immovable properties, including the property, is a parcel of land bearing Survey No. 95 Hissa No. 3, situated at Chovisawadi, District Pune (“the said Property”) were mortgaged in favour of the Petitioner to secure the obligations of Respondent No. 4 under the Debenture Trust Deed.

2. Respondent No. 4 purchased further immovable property under a Sale Deed dated 8.6.2015. The same was mortgaged in favour of the Petitioner under a Supplementary Deed of Mortgage dated 12.2.2016 to secure the performance of the obligations of Respondent No. 4. Based on the aforesaid documents, the Petitioner became the first charge holder in respect of the properties mentioned including the said Property. Respondent No. 4 failed to redeem the debentures on their due dates. In view of the same, the Petitioner became entitled to enforce its mortgage in respect of the various properties mortgaged to it including the said Property.

3. On one of the properties mortgaged to the Petitioner, Respondent No. 4 was developing a real estate project which was registered with Respondent No. 9. Respondent Nos. 10 to 15 had purchased fats from Respondent No. 4 in this project. Respondent Nos. 10 to 15 filed Complaints before Respondent No. 9 stating that Respondent No. 4 had not completed the project within the stipulated time and accordingly sought a refund of the monies paid by them to Respondent No. 4. Respondent No. 9 disposed of the Complaints filed by Respondent Nos. 10 to 15 by its Orders dated 14.2.2018 and 27.2.2018, directing Respondent No. 4 to refund the monies paid by Respondent Nos. 10 to 15 along with interest. It is the Petitioner’s case that Respondent No. 4 did not inform the Petitioner about these Orders and that the Petitioner became aware of the same shortly prior to the filing of the present Petition.

4. Since Respondent No. 4 did not pay the amounts due to Respondent Nos. 10 to 15 under the aforesaid Orders passed by Respondent No. 9, execution proceedings were initiated against Respondent No. 4 under Section 40 of the Real Estate (Regulation and Development) Act, 2016. In pursuance of the same, Respondent No. 9 issued a Recovery Warrant under Section 40(1) of the Real Estate (Regulation and Development) Act, 2016 and directed Respondent No. 1 to recover the amounts payable by Respondent No. 4 to Respondent Nos. 10 to 15 as arrears of land revenue.

5. Various notices were issued and correspondence was exchanged between May 2018 and February 2019 between the authorities under the Maharashtra Land Revenue Code, 1966 regarding recovery of the amounts due to Respondent Nos. 10 to 15 as arrears of land revenue. According to the Petitioner, the correspondence exchanged shows that they were aware of the encumbrance created over the said Property in favour of the Petitioner.

6. On 20.2.2019, Respondent No. 4 shared a Public Notice with the Petitioner which was issued by Respondent No. 2 inviting bids for the sale of the said Property by public auction to be held on 21.2.2019.  Consequently, the Petitioner by its Advocate’s Notice dated 21.2.2019 informed Respondent No. 2 of the fact that the Petitioner is the Mortgagee in respect of the said Property under the Debenture Trust Deed. The Public Notice for auction sale of the said property has been issued without disclosing the Petitioner’s mortgage over the same. The Petitioner asserted that it was a secured creditor having paramount rights over the said Property and called upon Respondent No. 2 to cancel the auction.

7. Despite the above, Respondent No. 2 proceeded with the auction as scheduled and passed an Order dated 21.2.2019 confirming the sale of the said property in favour of Respondent Nos. 3 and 3A for a consideration of Rs. 1,66,40,000/- without disclosing the Petitioner’s objections. Respondent No. 2 accepted twenty-five per cent of the sale consideration from Respondent Nos. 3 and 3A and called upon them to pay the balance consideration within eight days from 21.2.2019. The Petitioner thereafter made enquiries and discovered the information pertaining to the sale of the said Property. The Petitioner addressed a Letter dated 28.2.2019 to Respondent Nos. 1 to 3A, once again stating its objections to the sale of the said Property and calling upon them not to act in furtherance of the same. Being aggrieved, the Petitioner filed the present Petition challenging the auction under Article 226 of the Constitution of India, 1950

The Issue(s) of the Case

Whether the Petitioner is entitled for quashing of the auction sale of the said Property, the conclusion of the same in favour of Respondent Nos. 3 and 3A and the issuance of the Sale Certificate dated 11.3.2019?

The Observations of the Court

The Honourable Bombay High Court observed the following:

1. Critically analyzed Section 40(1) of the Real Estate (Regulation and Development) Act, 2016 and Rule 3 of the Maharashtra Real Estate (Regulation and Development) (Recovery of Interest, Penalty, Compensation, Fine Payable, Forms of Complaints and Appeal etc.) Rules, 2017.

2. Opined that the above provisions imply that the compensation and interest imposed upon a promoter under the Real Estate (Regulation and Development) Act, 2016 is recoverable as arrears of land revenue under the Maharashtra Land Revenue Code, 1966. Hence, it is in furtherance of these provisions that Respondent No. 9 issued a Recovery Warrant to Respondent No. 1 to recover the amounts awarded by it to Respondent Nos. 10 to 15 from Respondent No. 4 in the same manner as arrears of land revenue.

3. Critically analyzed Section 169 of the Maharashtra Land Revenue Code, 1966 and opined that the said section makes a clear distinction between actual arrears of land revenue due on account of land and amounts other than arrears of land revenue which are recoverable as arrears of land revenue under the Maharashtra Land Revenue Code, 1966.

4. Opined that the amounts of compensation and interest which have been awarded by Respondent No. 9 against Respondent No. 4 and in favour of Respondent Nos. 10 to 15 cannot be said to be actual arrears of land revenue as they are dues payable by a promoter of a real estate project to the flat purchasers under orders passed under the provisions of the Real Estate (Regulation and Development) Act, 2016

5. Observed that these amounts cannot be governed by Section 169(1) of the Maharashtra Land Revenue Code, 1966. Therefore, the claims of Respondent Nos. 10 to 15 as awarded by Respondent No. 9 cannot have priority over the properties of Respondent No. 4 in derogation of the Petitioner’s secured interest.

6. Contemplated that the Petitioner is a secured creditor of Respondent No. 4 and a Mortgagee in respect of the said Property under the Debenture Trust Deed. Therefore, the Petitioner is entitled to have its debts satisfied out of the said Property in priority over Respondent Nos. 10 to 15.

7. Critically analyzed the relevant provisions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and opined that the legislature gives an assurance to the secured creditor of having priority in case of recovery of its dues.

8. Critically analyzed Section 56 of the Transfer of Property Act, 1882 that has an inbuilt proviso that the subsequent buyer cannot exercise such a right of marshalling which could cause prejudice to the rights of the mortgagee. In the present case, the Auction Purchasers have failed to demonstrate that they are entitled to the marshalling of securities under the said Section.

9. With respect to the Petitioner’s contention that the auction sale of the said property is in favour of Respondent Nos. 3 and 3A were arbitrary and malafide, the Court opined that the revenue authorities were cautioned about the prior mortgage of the Petitioner but acting in a hasty manner, they proceeded with the auction which shows complete disregard and malafides on their part.

10. Based on the above observations, the Court opined that the dues payable by Respondent No. 4 to Respondent Nos. 10 to 15 are to be recovered in the same manner as arrears of land revenue under the relevant provisions of Chapter XI of Maharashtra Land Revenue Code, 1966.

11. Took cognizance of the fact that the auction sale was held within two days of the Public Notice in respect of the same being issued on 19.2.2019, thereby contrary to the mandatory 30 day period mentioned in Section 194 of the Maharashtra Land Revenue Code, 1966. Therefore, the mandatory provisions of the Maharashtra Land Revenue Code, 1966 are not followed while conducting the auction sale.

12. Reliance was placed upon several precedents such as State Bank of Indore v. Regional Provident Fund Commissioner and Ors, 1964 SCC Online MP 45; State Bank of India v. State of Maharashtra, Writ Petition No. 92816 of 2020; Vishal N. Kalsaria v. Bank of India and Ors, (2016) 3 SCC 762.

The Decision Held by the Court

1. The Honourable Bombay High Court set aside the auction sale of the said Property, the conclusion of the same in favour of Respondent Nos. 3 and 3A and the issuance of the Sale Certificate dated 11.3.2019 in favour of Respondent Nos. 3 and 3A.

2. The Honourable Bombay High Court directed the sale proceeds deposited by Respondent Nos. 3 and 3A be refunded. It further directed Respondent No. 9 to refund the amount of Rs. 1,66,40,000/- with accrued interest to Respondent Nos. 3 and 3A.

Click here to view/download the judgement >