Will Charge of Bank on a Leasehold Plot Mortgaged as Loan Security Have Priority Over Third Party Charges? Madhya Pradesh High Court Answers the Question [READ ORDER]

The Madhya Pradesh High Court in the case of Bank of Baroda v. State of Madhya Pradesh has held that a charge of Bank on the leasehold plot mortgaged as security towards the loan will have priority over other charges of the third party, including the State. 

This observation was made by the court in reference to the SARFAESI Act 2002 and Recovery of Debts and Bankruptcy Act, 1993.

 M/s Anmol Agro Pvt. Ltd. had availed the credit facilities from the Bank and for securing the repayment thereof, it sought to create a mortgage of various immovable proprieties in favor of the Bank also including leasehold rights of the property 

 Upon failure of the firm to repay the loan, the Bank auctioned the property and sought transfer of its leasehold rights in favor of the bidder.

 The District Industrial Centre then refused such permission to the bank on the ground that M/s Anmol Agro Pvt. Ltd. has not repaid the subsidy amount received by it from the Department and has not paid lease rent. 

The Bank then approached the High Court seeking transfer of lease-hold right in favor of auction purchaser on the ground that the mortgage deed was executed after obtaining NOC and that the auction proceedings were under the SARFAESI Act, 2002 for recovery of outstanding dues against the Bank.

 The District Industrial Centre argued that as per stipulation in Clause 41 the State Government has the first charge over and above any financial institution. 

It further urged that even while granting NOC for creating a mortgage in favor of the Bank, it was the condition of NOC that the Department will have priority right.

 Justice Sanjay Yadav and Justice Rajeev Kumar Dubey were the benches present for the above case.

The Bench relied on Section 26 of the SARFAESI Act which gives priority to secured creditors. 

It provides that after the registration of security interest the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, and other rates payable to the Central Government or State Government or local authority.

The court said that as for a direction to the District Industrial Centre to execute a lease in favor of the auction purchaser is concerned it can be done only after its dues are cleared.

The court reasoned that the NOC merely granted permission for the conveyance of leasehold right in favor of Bank on satisfying the conditions stipulated therein and there was no instrument/ order empowering the Bank to further assign the leasehold right of the land in question in favor of the auction purchaser.

The court concluded the order saying "Since the permission of conveyance of leasehold right in favor of Bank is granted with express terms and conditions, it is reiterated that the Bank, if they desire for the execution of lease deed, is bound to pay the arrears of rent."

[READ ORDER]