Tag: #IndianOverseasBank

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 14.09.2026

Bombay HC Holds Secured Creditor Has Priority Over Government Dues; State’s Re. 1 Auction Declared Null and Void

In a significant ruling concerning the priority of secured creditors over government dues, the Bombay High Court has ruled in favour of Indian Overseas Bank, holding that merely attaching a property for recovery of State dues, without completing the legally required proclamation and registration requirements, cannot give such government dues priority over the rights of a secured creditor under the SARFAESI Act, 2002.

The Division Bench of Justices Manish Pitale and Shreeram V. Shirsat consequently quashed an auction conducted by State authorities on 7 April 2018, under which mortgaged land was transferred to the Government for a nominal consideration of Re. 1. The Court also directed consequential deletion of the Government’s mutation entry and restoration of the Bank’s rights over the property.

Indian Overseas Bank Challenged State Auction of Mortgaged Land

• Indian Overseas Bank approached the Bombay High Court as a secured creditor, seeking to quash the auction sale dated 7 April 2018 concerning land bearing Survey No. 43/1/B. It also sought restoration of rightful control and possession of the land.
• The Bank had sanctioned financial facilities to the borrower in 2007, secured through an equitable mortgage created by deposit of the original title deeds. The charge was registered before the Registrar of Companies on 31 January 2007. Following repayment defaults, the borrower’s account was classified as a Non-Performing Asset (NPA) on 31 December 2010.
• Indian Overseas Bank thereafter initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and issued a demand notice under Section 13(2) on 28 September 2012. It subsequently issued a possession notice under Section 13(4) on 20 December 2012.

Bank Subsequently Sold Secured Assets Under SARFAESI

• The Bank eventually auctioned the mortgaged property on 26 November 2021 in favour of M/s Kaushal Metal and Steel Private Limited and M/s TGK Special Steel Private Limited.
• A sale certificate was issued on 22 February 2022 and possession was handed over. However, the Bank encountered difficulties in handing over control of the parcel corresponding to Survey No. 43/1/B.
• Upon examining the revenue records, the Bank discovered discrepancies between the survey numbers appearing in the Talathi’s records and those contained in the original title deeds.
• Further investigation revealed that old Survey No. 46/1/2 had been renumbered as 43/1/B, without any change in area. The Bank also discovered that the property had already been auctioned by the Tahsildar and that the State of Maharashtra’s name had been entered in the revenue records.

Government Sought Recovery of ₹2.68 Crore as Land Revenue Arrears

• The State proceedings arose from dues of approximately ₹2,68,99,000 allegedly owed by the borrower to the District Industries Centre.
• The Collector, Raigad, had directed the Tahsildar to recover these dues as arrears of land revenue. The State authorities thereafter claimed to have seized the property and recorded an encumbrance for ₹2.68 crore in the “other rights” column of the 7/12 extracts.
• An auction was scheduled for 7 April 2018. Since there were no other bidders, State officials participated on behalf of the Government and the land was purchased for a nominal price of Re. 1. A purchase certificate was subsequently issued in the name of the Government of Maharashtra under Rule 14-B of the Maharashtra Realisation of Land Revenue Rules, 1967.
• This ultimately created the conflict between the State’s recovery proceedings and the Bank’s pre-existing secured interest.

Indian Overseas Bank Claimed Priority Under Section 26E of SARFAESI Act

• Indian Overseas Bank argued that it held the first and prior charge over the mortgaged property and that the State-conducted auction was void ab initio and contrary to the SARFAESI framework.
• The Bank specifically relied upon Section 26E of the SARFAESI Act, under which a secured creditor’s dues are accorded priority over other debts and over revenues, taxes, cesses and other rates payable to the Central Government, State Government or local authorities.
• The Bank also produced its CERSAI registration certificate, which showed registration of the security interest on 14 February 2015, and relied heavily on the Full Bench judgment of the Bombay High Court in Jalgaon Janta Sahakari Bank Limited v. Joint Commissioner of Sales Tax.

Bombay HC Relies on Full Bench Ruling in Jalgaon Janta Sahakari Bank

• The Division Bench extensively relied upon the Bombay High Court Full Bench ruling in Jalgaon Janta Sahakari Bank Limited v. Joint Commissioner of Sales Tax.
• The Full Bench had explained that the expression “priority” means the right to enforce one claim in preference to others. It held that, having regard to the non-obstante provisions concerning secured creditors, their dues have priority over other dues, including revenues, taxes, cesses and rates payable to governmental authorities.
• The judgment therefore examined whether the State had taken the necessary legal steps capable of defeating or taking precedence over the Bank’s secured interest.

Mere Attachment Is Not Enough: Proclamation Must Follow Statutory Procedure

1. A particularly important part of the judgment concerns the distinction between merely attaching a property and completing the statutory procedure necessary to make that attachment effective against competing secured interests.
2. The Full Bench precedent relied upon by the Court required compliance not merely with attachment requirements but also with the prescribed proclamation procedure under the Maharashtra Land Revenue Code and the Maharashtra Realisation of Land Revenue Rules.
3. The Court reiterated that simply ordering an attachment is insufficient. Before an attached property is sold, a proclamation has to be issued in the prescribed form and publicly announced in the manner contemplated by law.
4. This procedural requirement became decisive in Indian Overseas Bank’s case.

State Failed to Show CERSAI Registration or Proper Proclamation

• The Bombay High Court found that the State authorities’ affidavit did not state that the Tahsildar had registered the State’s claim with CERSAI.
• More importantly, the State’s affidavit did not demonstrate that after attaching the property, the authorities had taken the further legally prescribed steps for proclamation—such as announcement by beating of drum or other customary mode, affixing the proclamation on a conspicuous part of the property, or displaying it on the notice board of the concerned Talathi office.

The Court therefore held that:

Simply attaching the property, without taking the prescribed steps towards proclamation for recovery of dues, would not give those State dues priority over the dues of a secured creditor under the SARFAESI Act.

Government Encumbrance Cannot Prevail Over Bank’s Secured Charge

• Having applied the Full Bench decision, the Court held that there was no reason to deny Indian Overseas Bank the benefit of the principles laid down therein.
• Since the Bank was admittedly a secured creditor seeking recovery under the SARFAESI Act, the Court concluded that the encumbrance/charge entered by the State authorities could not prevail over the Bank’s secured charge.
• The Court expressly clarified that the State authorities were not barred from recovering their dues altogether.
• They remained free to recover the amount in accordance with law. However, as far as priority was concerned, the Bank’s dues as secured creditor clearly ranked ahead of the dues claimed by the State respondents.

Auction Sale to Government for Re. 1 Quashed

• The High Court consequently allowed Indian Overseas Bank’s writ petition.
• It quashed the 7 April 2018 auction sale relating to Survey No. 43/1/B and declared the transfer of the land to the concerned State respondent null and void.
• The Court further directed restoration of rightful control and possession of the property—old Survey No. 46/1/2, subsequently renumbered as Survey No. 43/1/B—in favour of Indian Overseas Bank as secured creditor.

Government Mutation Entry to Be Deleted Within Four Weeks

• The High Court also ordered consequential correction of the revenue records.
• The State authorities were directed to take steps to delete Mutation Entry No. 1959 dated 16 April 2018, through which the Government of Maharashtra’s name had been entered in the occupant’s column of the 7/12 extract.
• These consequential steps were directed to be completed within four weeks from the date of the order.

Auction Purchasers to Get Clear Title Free From State Encumbrance

• The ruling also has direct implications for the purchasers who acquired the secured asset through the Bank’s SARFAESI auction.
• The High Court observed that, subject to other compliance requirements under the SARFAESI Act, the purchasers M/s Kaushal Metal and Steel Private Limited and M/s TGK Special Steel Private Limited would get clear title free from the encumbrances claimed by the State respondents.
• This aspect of the judgment reinforces the importance of priority rules not only for banks but also for purchasers of secured assets through statutory auctions.

State Can Recover From Surplus or Other Assets

• The judgment does not extinguish the Government’s underlying claim against the borrower.
• The Court directed that if any surplus remains after Indian Overseas Bank’s dues are satisfied, the Bank must notify the State authorities, which would then be entitled to the residual proceeds, if any.
• The State and the Collector’s office were also left free to proceed against any other assets or properties belonging to the borrower in accordance with law.

Significance of the Judgment

• The ruling is significant for banks, financial institutions, secured creditors, insolvency and recovery professionals and purchasers of secured assets, because it reinforces the statutory priority accorded to duly registered security interests.
• At the same time, the judgment makes an important qualification: a Government department’s claim does not disappear merely because a secured creditor has priority. Rather, the question is one of ranking and enforceability against the particular secured asset.
• The decision also demonstrates that an entry in revenue records or a bare attachment cannot automatically defeat a secured creditor’s rights. Where the law requires attachment, public proclamation and other procedural steps, those requirements must be demonstrated before a competing claim of priority can be sustained.

Key Takeaway

The Bombay High Court’s ruling establishes that State Government dues cannot take priority over a secured creditor merely because the State attached the mortgaged property. Where the prescribed proclamation procedure was not completed and the State’s claim was not shown to have been registered with CERSAI, the secured creditor’s statutory priority prevails.

Accordingly, Indian Overseas Bank succeeded in the writ petition. Its secured charge was held to have priority over the State’s dues, the State’s 2018 auction was quashed, the Re. 1 transfer was declared null and void, and consequential correction of the revenue records was ordered.

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Source: Bombay High Court

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