A secured creditor’s interest in the mortgaged property prioritises over any other creditors be it recovery warrant issued by the revenue authorities.

In the matter of IDBI Trusteeship Services Limited vs. District Collector Pune & Ors. in Writ Petition no. 3417 of 2019 decided on 25.06.2021 decided by the Bombay High Court.

Facts:
Respondent nos. 4-8, a real estate developer and its promoters, agreed to issue debentures in order to raise funds for an upcoming construction project. The Petitioner was appointed as the debenture trustee. The subject property was mortgaged by the Respondent nos. 4-8 to secure the Petitioner’s obligations. Respondent no. 4 company failed to redeem the debentures on its due dates and as a result the Petitioner became entitled to enforce its mortgage on the subject property.
In the meantime, Respondent nos. 10-15 who were flat purchasers, filed RERA complaint against Respondent no. 4 and obtained an order of refund of monies along with interest. Upon non-payment of dues by the Respondent no. 4, execution proceedings were initiated against Respondent no. 4 under Section 40 of the RERA Act, 2016. Section 40 prescribes that such amount is recoverable from the promoter as arrears of land revenue in the manner provided under the Maharashtra Land Revenue Code, 1966. Accordingly, a recovery warrant was issued to the Respondent no. 1 – District Collector for recovery of amounts. In pursuance of the recovery proceedings, the Respondent no. 1 issued a public notice for auction of the subject property. The Petitioner filed its objection before the R-1 stating that the Petitioner was the mortgagee of the subject property and the public notice ought to be revoked. The Respondent no. 1 still went ahead and conducted the auction successfully.
The said auction sale was under challenge in the present proceedings.
The Petitioner contended that the action sale was conducted without disclosing the Petitioner’s mortgage. The primary contention of the Petitioner was that it had a priority in view of its prior registered mortgage in respect of the subject property.
Held:
The Bombay High Court referred to Section 40 of RERA Act read with Maharashtra RERA rules, 2017 to observe that compensation and interest imposed upon a promoter under RERA is recoverable in the same manner as arrears of land revenue under the MLRC. The Court next referred to the Section 169 of MLRC which makes a clear distinction between actual arrears of land revenue due on account of land, and amounts other than arrears of land revenue which are recoverable as arrears of land revenue under the MLRC. In the former case, the arrears of land revenue due on account of land, amount to a paramount charge on the land in question, which shall have precedence over all other debts. However, in the latter case, the claim of the State Government to monies recoverable as other than arrears of land revenue but in the same fashion, have priority only over unsecured claims and not over secured debts. Hence, in the present case the claim against the promoters under RERA clearly falls in the latter category. Therefore, the claims of Respondent Nos. 10 to 15 as awarded by Respondent No. 9 cannot have priority over the properties of Respondent No. 4 in derogation of the Petitioner’s secured interest therein.
The Court further drew parallel from other enactments such as the RDB Act and the SARFAESI Act which also prioritises the interest of a secured creditor over all other kinds of creditors.