Law Is Meant for the Common Man, Should Be Drafted Simply: Karnataka HC [Read Judgment]

Bengaluru: The High Court of Karnataka has dismissed an application filed by an asset reconstruction company seeking recall of attachment notices issued by the Commercial Tax Department, holding that a statutory first charge created independent of any non-obstante clause cannot be displaced by the priority conferred on secured creditors under Section 26E of the SARFAESI Act.

Justice Anant Ramanath Hegde, deciding a batch of three connected Company Applications arising out of the winding up of M/s. BPL Engineering Limited, permitted the Commercial Tax Department of Telangana to proceed with the sale of the company's mortgaged land at Pashamylaram village, Patancheru Mandal, to recover tax arrears exceeding Rs. 74 crores. The Court simultaneously recalled its earlier order dated 12.09.2024, which had allowed Omkara Assets Reconstruction Private Limited to sell the same property outside the liquidation proceedings without hearing the tax department.

BPL Engineering had mortgaged the property in 1997 and 1998 in favour of an IDBI-led consortium. The loan account turned into a non-performing asset in 2001, and the debt was eventually assigned to the Stressed Assets Stabilisation Fund and later, in 2024, to Omkara Assets. The Commercial Tax Department, meanwhile, had issued attachment orders in 2007 and 2011 for recovery of arrears under the Andhra Pradesh General Sales Tax Act, the Central Sales Tax Act, and the Andhra Pradesh Value Added Tax Act. The company was ordered wound up by this Court in 2012.

Omkara Assets contended that Section 26E of the SARFAESI Act, which confers priority payment on secured creditors after registration of their security interest with the Central Registry (CERSAI), overrides the department's statutory charge, and that the provision, even if held prospective, should still be given retroactive application to proceedings that remain pending adjudication. Reliance was placed on the security interest having been registered with CERSAI in 2021, long after the mortgage was created but before the present dispute reached finality.

The Commercial Tax Department countered that Section 26E only confers priority in payment and does not itself create a first charge, and that the statutory first charge available to the State under its taxation enactments, having crystallised independently of any non-obstante clause, remains unaffected by the later registration.

Examining the rival contentions in light of the Supreme Court's recent ruling in Jalgaon District Central Co-operative Bank Ltd. versus State of Maharashtra, the Court held that a distinction must be drawn between a mere priority in payment and a first charge validly created dehors a non-obstante clause. Where such an independent statutory first charge exists, as under Sections 16(4) and 16C of the erstwhile Andhra Pradesh General Sales Tax Act, it prevails over the priority conferred under Section 26E, notwithstanding that the SARFAESI Act is the later enactment.

The Court also examined the Supreme Court's ruling in Punjab and Sind Bank versus State of Punjab, which held Section 26E to be prospective, and clarified that a provision declared prospective is not, for that reason alone, automatically excluded from retroactive operation. However, since the question of overriding a statutory first charge already stood answered against secured creditors, the retroactivity argument did not survive for consideration in the present case.

On a related question, the Court held that although the Central Sales Tax Act, 1956 does not itself create a statutory first charge, the recovery machinery borrowed from State sales tax laws under Section 9 of that Act carries with it the first charge available under those State enactments.

Before parting with the matter, the Court made pointed observations on the recurring uncertainty surrounding whether an amended provision operates prospectively, retrospectively, or retroactively, noting that Chapter IVA of the SARFAESI Act alone had generated considerable divergence among courts. The Court observed:

It would always be desirable for the Legislature, while introducing an amendment, to indicate in clear terms whether the law or the amended provision is prospective, retrospective, retroactive.

Pointing to the drafting practice once followed in enactments such as the Indian Penal Code, the Indian Contract Act, and the Transfer of Property Act, the Court urged a revival of the use of illustrations in modern legislation. It observed:

After all the law is meant for the common man and should be drafted in the simplest possible way. It should never be a puzzle.

The Court clarified that these observations were not an attempt to issue directions on legislative policy, but only to draw attention to a practice that, if revived, could reduce uncertainty and avoid unnecessary litigation.

Accordingly, the Court dismissed Omkara Assets' application seeking recall of the attachment notices, allowed the Commercial Tax Department's application for recall of the earlier sale order, and permitted the department to proceed with the sale of the property, directing that the sale proceeds be deposited with the Official Liquidator pending adjudication of competing claims.

Appearances: Senior Counsel Sri K G Raghavan, with Sri Vignesh Shetty, Advocate, appeared for Omkara Assets Reconstruction Private Limited. Sri Manu Prabhakar Kulkarni, Advocate, appeared for the Commercial Tax Department. Sri Shrishail Navalgund and Sri Shrishail Raghavan, Advocates appeared for the Official Liquidator.

Case Title: Omkara Assets Reconstruction Private Limited versus Official Liquidator of M/s. BPL Engineering Limited & Ors.

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