Priority of Mortgage Defaults

img2By Accommodation Times Archives

The housing finance companies and the Banks, whether in public sector or private, hereinafter referred to as the financial institutions, have been providing financial assistance for the purpose of acquiring residential houses, commercial premises or towards working capital against security of immoveable properties either by way of registered mortgage or equitable mortgage, as per the facts and circumstances of each case.  Though the title of immoveable properties, offered by way of mortgage, is thoroughly got examined by these financial institutions and all other aspects are gone into; but there is always a lurking fear in their mind that in case of default, if the security is enforced and the immoveable property is auctioned to recover the mortgage dues, the Government dues, if any, will have the priority over the mortgage dues.

This concept is, rightly or wrongly, based on the common law principle of the prerogative of the crown to recover its debt before all other creditors.  Crown debt means the debt due to the Government or the departments or the bodies such as Income Tax, Central Excise, Sales Tax, Municipal Corporations, MHADA, MIDC, CIDCO, State Financial Corporation, which derive this power of priority by way of statutory provisions.  This common law principle was being enforced by the various High Courts in our country till the year 1950 and, thereafter, this common law principle saved by Article 372 of the Constitution of India found incorporated, with the passage of time, in various statutes providing that the statutory dues shall have the first charge over the properties of the tax-payers.


However, the preferential right of the crown of recovery of debts over other creditors has been held as confined to ordinary or unsecured creditors under even the common law of England and the principles of equity and good conscience (as applicable to India) did not accord the Crown a preferential right for recovery of its debts over a mortgagee or a pledge of goods or a secured creditor, as held in Giles V/s Grover, that the Crown has no precedence over the pledge of goods and it confined only to ordinary or unsecured  creditors.


Such statutory provisions in our country in the various Acts, such as Income Tax Act, Central Excise Act, State Sales Tax Acts, and so on provided that the dues of Government or the respective departments or the Government bodies were recoverable as land revenue.  The question of recovering such dues as land revenue came up for examination before the Bombay High Court in the case of Union of India & others v/s. SICOM Ltd. & Another, which held that Section 169, Sub-Section (1) of Maharashtra Land Revenue Code, provides that the arrears of land revenue due on account of land shall be paramount charge on the land and every part thereof and shall have precedence over any other debt, demand or claim whatsoever, whether in respect of mortgage, judgment-decree, execution or attachment or otherwise against any land or the holder thereof; whereas sub section (2) provides that the claim of the State Government to any monies, other than areas of land revenue, but recoverable as land revenue demand under Chapter-II shall have priority over all unsecured claims against any land or holder thereof.   Thus the distinction between the arrears of land revenue  and the statutory dues recoverable as land revenue is self-evident.


As regards the question of precedence of Government dues, there has been a consistency in the judicial pronouncements inasmuch as in the case of M/s.Builders Supply Corporation v/s the Union of India and others (AIR 1965 SC 1061), the Hon’able Supreme Court held that Section 46 (2) of the Income Tax Act, 1922, which enable the Income Tax Officer to forward to the Collector a certificate, specifying the amount of arrears due from an assessee and requiring the collector to recover the same, could not be construed  to convert arrears of tax into arrears of land revenue.  Yet again in Bank of Bihar v/s state of Bihar & other (AIR 1971 Sec 1210) it laid down that the Cane Commissioner indisputably did not have any right of priority for recovery of arrears of Cess under the Public Demands Recovery Act over the other creditors in particular the secured creditors, as Section 172 of the Contract Act defines a pledge to mean the bailment of goods as security for payment of debt or performance of a promise.


The principle of recovery of land revenue and the dues recoverable as land revenue has been considered at length by the Hon’able Supreme Court of India in the famous case of Dena Bank v/s Bhiklabai Prabhudas Parekh & Co. [(200) 5-SCC-694] and it has been held that the Crown’s preferential right to recovery of debts over other creditors is confined to ordinary or un-secured creditors  and the government debts in India are not entitled to precedence over the prior secured debt.  It has been followed by the Andra Pradesh High Court in Sitani Textiles & Fabrics (P) Ltd. v/s Assistant Commissioner of Customs and Central Excise, Hyderabad [1999-(106) ELT – 296 AP)] that so long the claim of a Pawnee, which has a special lien on the property and not of an ordinary nature on the goods, is not satisfied no other creditor or the Pawnor has any right to take away goods or its price and the right of a Pawnee could not be extinguished  by the subsequent attachment or the seizure of the goods under any other law and an unsecured creditor was entitled only to the surplus money after the satisfaction of the secured creditor’s dues.


In the case of Bank of India v/z. Siriguppa Sugars & Chemicals Ltd. [(2007)-8-SCC-353] where the goods of the respondent were forcibly taken possession on the orders of the Cane Commissioner, despite the fact that they were validly pawned to the Bank of India, the Hon’able Supreme Court of India reiterated that the rights of the Bank, as Pawnee, could not be affected by the orders of the Cane Commissioner, as the goods were validly pawned to the Bank of India.   Under the Rajastan Sales Act 1954 the Commercial Tax Officer, Bharatpur, claimed priority for the recovery of the sales tax dues from the sale proceeds of the mortgaged property, but the Hon’able Supreme Court held that the claim of the mortgagee will have precedence over the claim of the sales tax authorities.  (State Bank of Bikaner & Jaipur v/s National Iron & Steel Rolling Corporation & others [(1995) 2 SCC 19].


Recently, a question whether the realization of the duty under the Central Excise Act will have priority over the secured debts in terms of State Financial Corporation Act 1951 came up for consideration before the Hon’able Supreme Court of India in the case of Union of India and others v/s SICOM Ltd. & Another.  After considering the various provisions of law and the judgments, the Hon’able Supreme Court clarified that the non-obstante clause in Section 46B of the State Financial Corporation Act shall not only prevail over the contract but also other laws and the appeal of Union of India, claiming precedence of recovery of central excise dues over the mortgage dues, has been dismissed on the 5th December 2008, with costs.


Therefore, law has been clearly laid down by the Hon’able Supreme Court of India by way of various judicial pronouncements, particularly, Dena Bank case and the latest case of Sicom Ltd. and there should not be any iota of doubt,  that any dues of the Central Government or the State Government, as per the various enactments providing the recovery of the dues as land revenue, shall not have any precedence over the mortgage debts of the Financial Institutions as the Government dues could not be construed to mean arrears of land revenue, nonetheless such dues shall have precedence for recovery as land revenue as against ordinary and unsecured creditors, except the case of a company borrower in liquidation wherein the dues of the workmen, by virtue of Section 529-A of the Indian Companies Act, shall have the precedence  over the secured creditors.  In view of the principle so laid down, the claim of unpaid property tax, lease rental arrears of the Govt. Companies such as CIDCO, MHADA, MIDC or Society maintenance dues and son may not have the precedence over the mortgage dues of the Financial Institutions, despite the various enactments providing recovery of such dues as land revenue.


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