The Hindu Business Line : Property mortgaged against loan — HC stays auctioning by Tax Recovery Officer

THE Madras High Court has granted interim stay of a notice issued by the Tax Recovery Officer XXI, Chennai, for auctioning a property which had been mortgaged in favour of a finance company against a loan granted to a business firm.

India Cements Finance & Capital Ltd, Chennai, which had granted the loan of Rs 20 lakh to Prashanth Clothes, on noticing an advertisement published by the Tax Recovery Officer in a local newspaper bringing the property (which had been mortgaged with the finance company) for auction sale, filed a writ petition pointing out the illegality of the notice and praying for a direction to stay all further proceedings in the matter.

Mr Justice K.P. Sivasubramanian, who heard the petition, referred to the judgment of a Division Bench of the Court in ICICI Bank Ltd vs Official Liquidator, High Court, Madras, which was relied upon by counsel for the petitioner, Mr Aravind M. Subramaniam, and granted the interim stay of the further proceedings, pursuant to the notice dated February 13, 2005, of the Tax Recovery Officer.

The petitioner's main contention was that the second respondent (Prashanth Clothes) had obtained a loan of Rs 20 lakh from the petitioner for meeting working capital requirements. The second respondent had clearly mentioned in its application that the loan was against the mortgage of the property mentioned in the schedule. Apart from creating an equitable mortgage for the property, the second respondent also executed a loan agreement and a promissory note.

According to the petitioner, the second respondent started defaulting the repayments, and despite several letters, no payment was forthcoming. The entire proceedings of the first respondent (Tax Recovery Officer) were much after the mortgage was created, and hence the claim of the petitioner would have to be examined before bringing the property for auction. The petitioner said he had no efficacious and alternative remedy than to approach the Court under Article 226 of the Constitution. The notice had been issued in violation of Article 300-A of the Constitution. The act of the first respondent was violative of the principles of doctrine of priority and was also opposed to the principles of natural justice.

The doctrine of priority of secured creditors over the Crown Debts had also been upheld by the Supreme Court in the case of Dena Bank vs Bhikbabhai Prabhudas Parkash & Co (2004) CTC 170. This had been followed by the Division Bench of the Madras High Court reported in 2005 (1) Law Weekly, pg. 424.

The petitioner prayed for staying the further proceedings pursuant to the notice issued by the Tax Recovery Officer.

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