The recent court judgment in a legal case highlights an important aspect of debt precedence – the priority of secured debt over Crown debt. The court’s in-depth legal analysis delves into the interpretation of rules pertaining to property transfers under attachment orders. This case serves as a significant precedent for similar disputes involving the hierarchy of debts in legal proceedings.
Facts
- The DRT allowed the OA filed by Respondent No.5, directing BPIL to pay Rs.4,76,14,943.20/- with interest.
- Respondent No.2 issued a proclamation of sale on 19.08.2004, with a public auction on 28.09.2004.
- The property was attached on 29.11.2002 following Rule 48 of Schedule II.
- Appellant made an offer of Rs.23,00,000/-, which was accepted by Respondent No.2.
- MIDC received an attachment letter from Respondent No.4 on 17.06.2003 regarding the property.
- Appellant requested MIDC to transfer the property based on the Sale Certificate issued by DRT on 25.01.2005.
- Writ Petition filed in High Court seeking ‘No Objection’ for property transfer and to restrain Respondent No.4 from enforcing the attachment.
- High Court dismissed the Writ Petition, leading to the appeal being filed by the Appellant.
- The High Court held that the notice under Rule 2 of Schedule II to the Act was issued on 11.02.2003 and the property in dispute was attached under Rule 48 on 17.06.2003.
- The sale in favor of the Appellant took place on 09.12.2004, subsequent to the notice and attachment, making the transfer of the property void.
- The argument that the sale was at the behest of the DRT and not the defaulter was not accepted by the High Court.
- The High Court dismissed the Writ Petition based on these findings.
- The property was mortgaged by BPIL in 2000 and recovery certificate was issued by DRT in 2002.
- The property was attached prior to the notice by the Income Tax Officer under Rule 2 of Schedule II to the Act.
- After an attachment under Rule 16(2), no transfer can be made contrary to the attachment as per the High Court’s interpretation of Rule 16 of Schedule II to the Act.
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Arguments
- Rule 2 and Rule 16 of Schedule II are not applicable to the case as a charge over the property was created prior to the issuance of the notice under Rule 2.
- Government debt in India does not have precedence over a prior secured debt.
- BPIL was in default of payment of income tax leading to a penalty, and a notice under Rule 2 of Schedule II was issued on 11.02.2003 following prescribed procedure.
- No property subject to a notice can be transferred after issuance of the notice under Rule 2.
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Analysis
- Rule 16(1) prevents a defaulter or his representative from dealing with any property subject to a notice under Rule 2.
- No civil court can execute a decree against attached property without permission from the Tax Recovery Officer.
- The Crown debt has priority under Schedule II to the Act, making transfers of attached property void.
- The sale of the property to the Appellant took place after the attachment order in 2003.
- The property was mortgaged in 2000, and a recovery order was passed in 2002 against BPIL.
- Rule 16(2) declares private transfers of attached property as void against all claims enforceable under the attachment.
- When a certificate has been drawn up by the Tax Recovery Officer for the recovery of arrears under this Schedule, a notice requiring the defaulter to pay the specified amount within fifteen days must be served.
- The notice must intimate that steps will be taken to realize the amount if the payment is not made within the stipulated fifteen days.
- Upon service of the notice, the defaulter or his representative in interest cannot mortgage, charge, lease, or deal with any property without permission from the Tax Recovery Officer.
- No civil court can issue any process against the defaulter’s property in execution of a decree for payment of money once a notice has been served.
- It is trite law that, unless there is preference given to the Crown debt by a statute, the dues of a secured creditor have preference over Crown debts.
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Decision
- Respondent No.4 is restrained from enforcing the attachment order dated 17.06.2003.
- The High Court did not consider that the property sale was pursuant to an order by the DRT that already had a charge on the property prior to the notice on 11.02.2003.
- The charge on the property existed before the notice under Rule 2 of Schedule II to the Act by Respondent No.4.
- The Appellant’s submissions are deemed valid.
- The High Court’s judgment is overturned, and the Appeal is granted.
- MIDC is instructed to issue a ‘No Objection’ certificate to the Appellant.
Case Title: M/S CONNECTWELL INDUSTRIES PVT.LTD. Vs. UNION OF INDIA THROUGH THE MINISTRY OF FINANCE (2020 INSC 287)
Case Number: C.A. No.-001919-001919 / 2010
