Axis Bank Ltd. v. State of Maharashtra (2017) 138 CLA 212 (Bom.)

The case discusses the provisions and norms to be followed at the time of winding up of the company. At the time of liquidation, workmen’s dues and secured creditors dues are given important consideration and all their debts are cleared off on preferential basis. Therefore, in the present case, the assets of the company are sold for the repayment of the loan amount instead of the taxes.
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Introduction

The case of Axis Bank Ltd. v. State of Maharashtra came into picture in order to resolve the conflict regarding the amount received from the sale of the assets of a company which is winding up. The case leads to settle the conflict between Sections 529-A of the Companies Act, 1956 stating a preference should be given to secured creditors over all other dues at the time of the liquidation and Section 38 of the Maharashtra Value Added Tax, 2002 implying that if there is any liability on the company to pay any tax then it has the right to recover that tax by selling the assets or profit of the company. The court resolved the issue by taking into consideration several judicial pronouncements and held that Companies Act being a central legislature would prevail over any state legislature. Therefore, the money received from the sale of assets of the company through auction is retained by the Axis Bank Ltd.

Facts of the Case

The present petition has been filed by Axis Bank Ltd. against Assistant Commissioner of Sales Tax, Thane who is the respondent No. 1 and M/s Jay Mechanical Pvt. Ltd. represented by its Official Liquidator who is the respondent No. 2. In the year 2008, the petitioner bank provides financial assistance to the respondent No. 2 (company) and in order to secure the finances, the company mortgaged its immovable property and hypothecated its assets in favor of the bank. The respondent company defaulted in making the payment due to which the petitioner bank issued a notice under section 13 (2) on 6th June, 2011 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 calling upon the Company to repay the amount of loan within a period of 60 days from the date of the notice. The company was unable to repay the loan amount within the prescribed time period therefore; the petitioner bank took over the possession of the secured assets of the company. The respondent No. 1 issued a Prohibitory Order under Section 38 of Maharashtra Value Added Tax Act, 2002 by restraining it from alienating any of the assets of the company. The petitioner bank kept the property of the company for Auction Sale and it was sold to the highest bidder. The petitioner bank again received a notice on 22nd July, 2013 under Section 38 of the Maharashtra Value Added Tax, 2002 to provide the respondent No. 1 the details of the Auction Sale. Further, the petitioner received two notices issued by respondent No.1 on 12th August, 2013 and 19th September, 2013 respectively calling upon the petitioner to deposit an amount of Rs.46,49,317/- with the respondent No.1 which is the tax amount need to be paid by respondent No. 2 to respondent No. 1. Therefore, the present petition has been filed by the petitioner bank to quash the notices dated 12th August, 2013 and 19th September, 2013 issued by respondent No. 1.

Issues

  • Whether the notices issues by respondent No. 1 in favour of petitioner to pay them the tax amount should be quashed?
  • Whether the petitioner or the respondent state have the priority claim over the money advanced through auction sale of the property?

Contentions from both the sides

Petitioner

  • The petitioner submitted that they being secured creditors have favourable rights over the assets of the company under Section 529-A of the Companies Act.
  • The petitioners contended that since the respondent company is under liquidation then the petitioners being the secured creditors can stand out of liquidation proceedings.
  • It further submitted that the respondent No. 1 has a right to approach DRT but it has no right to commence any proceedings against the petitioner.

Respondent

  • The Counsel for respondent contended that as per the provisions of Section 37 of the Maharashtra Value Added Tax Act, 2002 the first right over the property belong to the respondent State.

Summary of the Judgement

The Court in Axix Bank Ltd. case is of the view that the petitioner is a secured creditor having overriding preferential claim who decides to stand outside the winding-up proceeding to claim his finances. The petitioner, in the light of Section 529-A, is beyond the winding-up proceedings could definitely have precedence over the State’s claim in respect of statutory dues. The court in Axis Bank Ltd. v. State of Maharashtra case opined that the contentions put forward by the Counsel for respondents are justified in any normal circumstance and certainly be prioritized and no priority can be claimed by the financial institutions over the state’s first charge for recovering the amount of sales tax. However, in the present case of Axis Bank Ltd. v. State of Maharashtra , the company is under liquidation and as per Section 529-A of the Companies Act, 1956, the claim of the secured creditor should be done through the money recovered by the sale of assets in an auction. It must also be taken into consideration there is statutory recognition of priority claim of the secured creditor in view of the amendment brought in 2016 by introducing Section 26-E providing for priority to the secured creditor over all other debts and all taxes, and other rates payable to Central Government or the State Government or the Local Authority.

Analysis

This case is an appropriate example to resolve any conflict between any provision of a Central Legislature and State Legislature. The case implies that finances of a secured creditor will always be prioritized over the taxes payable to any government if the company is under liquidation. In any normal circumstance the importance is given to the provisions laid down by the central government. The Court while reaching the conclusion for this case relied upon several landmark judicial pronouncements. This case became a precedent in itself to protect the interest of the financial institutions to recover back the loan advanced by them by selling the assets of the company through auction.   

Conclusion

In the present case, court is of the opinion that in view of Section 529-A, the secured creditors such as banks and financial institutions need to be prioritized over sales tax dues, taxes when the company is under liquidation and the secured creditor has kept it out of the winding up process. Simultaneously, central legislations are given importance over state made laws. There is also legislative approval of the secured creditor’s claim in light of the 2016 amendment incorporating Section 26Eof the Securitization Act, which provides for priority to secured creditors over all other debts and dues.

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