Bombay High Court Quashes State’s ₹1 Auction of Mortgaged Land; Holds Secured Creditor’s SARFAESI Charge Has Priority Where Government Failed Statutory Attachment and Proclamation Requirements
Bombay High Court Quashes Government’s ₹1 Purchase of Mortgaged Land; Holds Indian Overseas Bank’s Secured Debt Has Priority Over State Recovery Dues
Facts
The Indian Overseas Bank, acting as a secured creditor, approached the Bombay High Court seeking to quash an auction sale dated 7 April 2018 conducted by the Tahsildar and Talathi concerning land bearing Survey No. 43/1/B. The Bank also sought restoration of control and possession of the land.
In 2007, the Bank sanctioned financial facilities to Respondent No. 5. The facilities were secured through an equitable mortgage by deposit of title deeds, and the Bank retained the original title documents. Its charge was registered with the Registrar of Companies on 31 January 2007. After repayment default, the borrower’s account was classified as an NPA on 31 December 2010.
The Bank commenced proceedings under the SARFAESI Act, 2002, issuing a Section 13(2) notice on 28 September 2012, followed by a possession notice under Section 13(4) on 20 December 2012.
Eventually, the mortgaged properties were auctioned by the Bank on 26 November 2021 to M/s Kaushal Metal and Steel Private Limited and M/s TGK Special Steel Private Limited, and a sale certificate was issued on 22 February 2022. The Bank, however, could not hand over control of Survey No. 43/1/B.
Further investigation revealed that Old Survey No. 46/1/2 had been renumbered as Survey No. 43/1/B, without any change in area. The Tahsildar had separately proceeded against this land to recover government dues of ₹2,68,99,000 owed by the borrower to the District Industries Centre.
The State authorities had scheduled an auction on 7 April 2018. As no private bids were received, the Talathi, acting for the Government, purportedly purchased the property for the nominal price of Re. 1, and a purchase certificate was issued in the name of the Government of Maharashtra.
The dispute therefore concerned the competing claims of the Bank as a secured creditor under SARFAESI and the State authorities seeking recovery of government dues as arrears of land revenue.
Issues
The principal issue was whether the State’s claim for recovery of ₹2.69 crore could take priority over the Bank’s security interest in the mortgaged property.
The Court also had to determine whether the State authorities had validly attached and proclaimed the property in accordance with the Maharashtra Land Revenue Code, 1966 and Maharashtra Realisation of Land Revenue Rules, 1967, so as to defeat or obtain priority over the secured creditor.
A further issue was whether the 7 April 2018 auction and Re. 1 transfer in favour of the Government of Maharashtra could survive when the Bank had already initiated SARFAESI measures.
Petitioner’s Arguments
The Bank argued that the government auction took place while its SARFAESI enforcement measures were already subsisting, possession having been invoked through the notice dated 20 December 2012.
It relied upon a CERSAI registration certificate recording registration on 14 February 2015 and contended that the controversy was covered by the Full Bench judgment of the Bombay High Court in Jalgaon Janta Sahakari Bank Limited v. Joint Commissioner of Sales Tax.
The Bank further asserted that it held the first and prior charge over the property and that the Tahsildar’s auction was void ab initio and inconsistent with SARFAESI.
Significantly, it contended that the State’s own 8 February 2013 panchanama did not describe Old Survey No. 46/1/2, now Survey No. 43/1/B, as one of the properties attached.
Finally, the Bank invoked Section 26E of the SARFAESI Act, contending that a secured creditor has priority over other debts, including revenues, taxes, cesses and rates payable to governmental or local authorities.
Respondent’s Arguments
The State authorities contended that the District Industries Centre had requested recovery of ₹2,68,99,000 from the borrower on 23 October 2012, following which the Collector directed the Tahsildar on 3 November 2012 to recover the dues.
After the borrower failed to pay, the Tahsildar directed seizure of the properties under Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967, and an encumbrance for ₹2.69 crore was recorded in the “other rights” column of the 7/12 extracts.
The State maintained that the subsequent auction was conducted in accordance with the revenue recovery mechanism. As no bidder appeared, the Talathi purchased the land for the Government for Re. 1 under Rule 14-B, after which Mutation Entry No. 1959 was recorded in favour of the Government.
Analysis of the Law
Section 26E Gives Secured Creditors Priority
The Court relied substantially upon the Full Bench judgment in Jalgaon Janta Sahakari Bank Limited v. Joint Commissioner of Sales Tax.
The Full Bench had interpreted “priority” under Section 26E as the secured creditor’s right to enforce its claim in preference to others, including revenues, taxes, cesses and other government dues.
However, the question was not resolved merely by comparing statutory charges. The Court examined whether the State had perfected its prior revenue recovery proceedings through a legally valid attachment and proclamation.
Mere Attachment Is Insufficient
The Full Bench precedent made clear that under the Maharashtra revenue recovery framework, simply ordering an attachment is insufficient.
A valid proclamation must also be issued and publicly announced, including through beating of drums and other modes prescribed under Section 192 of the Maharashtra Land Revenue Code and Rule 11(2) of the 1967 Rules, before attached property is sold.
Thus, a government department seeking priority cannot merely show that a recovery demand existed or that an attachment entry had been made.
No Evidence of Statutory Proclamation
This defect proved decisive.
The State’s affidavit did not establish any CERSAI registration of its claim. More importantly, it disclosed no action after attachment showing compliance with the statutory proclamation requirements.
There was no material demonstrating beating of drums or another customary mode of proclamation, affixation on a conspicuous part of the secured asset, or display on the Talathi office notice board.
The Court therefore held that simply attaching the property without taking the legally required steps towards proclamation could not give the State’s dues priority over those of the secured creditor.
State’s Charge Could Not Prevail Over Bank’s Security
Since Indian Overseas Bank was admittedly a secured creditor pursuing recovery under SARFAESI, the Court held that the State’s encumbrance/charge could not prevail over the Bank’s secured charge.
Importantly, the Court did not extinguish the State’s underlying debt. It clarified that the authorities remained entitled to recover their dues in accordance with law, but as a question of priority, the Bank ranked ahead of them.
Precedent Analysis
The central authority was the Full Bench decision in Jalgaon Janta Sahakari Bank Limited v. Joint Commissioner of Sales Tax.
The Court specifically relied on paragraphs 85, 151–154 and 297–300 of that judgment.
The Full Bench established two important propositions relevant here.
First, Sections 26E of SARFAESI and 31B of the RDDB Act confer priority upon secured creditors over government revenues and statutory dues, subject to the applicable statutory framework.
Second, for a prior government attachment to potentially defeat secured-creditor priority, the attachment must have been made in accordance with law and followed by the prescribed public proclamation. Without such proclamation, a government department cannot rely merely upon an earlier attachment or statutory charge to defeat the secured creditor.
The Full Bench also emphasised the significance of CERSAI registration. Where the government claim/attachment is not registered and there is no proof of a legally perfected prior attachment, the government claim becomes subservient to the secured creditor’s priority.
The Division Bench applied these propositions directly to Indian Overseas Bank.
Court’s Reasoning
The Court found a fundamental evidentiary and procedural deficiency in the State’s case.
Although the State relied on attachment and revenue recovery proceedings, its affidavit was conspicuously silent about CERSAI registration and failed to establish the mandatory steps for public proclamation of attachment.
Accordingly, the State could not obtain priority merely because its recovery machinery had commenced earlier.
The Court held that Indian Overseas Bank, being a secured creditor recovering under SARFAESI, was entitled to the benefit of the Full Bench ruling in Jalgaon Janta Sahakari Bank. The State’s encumbrance therefore could not prevail over the Bank’s charge.
Since the Bank had already sold the secured asset to Kaushal Metal and Steel Pvt. Ltd. and TGK Special Steel Pvt. Ltd., the Court further held that, subject to SARFAESI compliance, the purchasers would obtain clear title free from the encumbrances claimed by the State authorities.
Conclusion
The Bombay High Court allowed the writ petition and quashed the 7 April 2018 revenue auction, thereby declaring the transfer of Survey No. 43/1/B in favour of the State authorities null and void.
The Tahsildar and Talathi were directed to restore rightful control and possession of Old Survey No. 46/1/2, renumbered as Survey No. 43/1/B, to Indian Overseas Bank as the secured creditor.
The Court further directed deletion of Mutation Entry No. 1959 dated 16 April 2018, which recorded the Government of Maharashtra as occupant, within four weeks.
The State’s recovery rights were nevertheless preserved. If any surplus remains after satisfaction of the Bank’s dues, the State authorities may claim the residual proceeds. They are also free to proceed against other assets of the borrower in accordance with law.
Case Details
Case: Indian Overseas Bank v. State of Maharashtra & Ors.
Court: Bombay High Court, Civil Appellate Jurisdiction
Case Number: Writ Petition No. 10120 of 2022 with Interim Application No. 427 of 2026
Citation: 2026:BHC-AS:37533-DB
Bench: Justice Manish Pitale and Justice Shreeram V. Shirsat
Reserved: 10 August 2026
Pronounced: 11 September 2026
Result: Petition allowed; State’s 7 April 2018 auction and transfer quashed; Bank’s secured-creditor priority upheld; possession/control ordered to be restored and Government mutation directed to be deleted within four weeks.
