There is no Crown and the illusive crown has no precedence in recovery of arrears.
Long after the Crown has left us, our rulers still believe that they wear a crown and the bureaucracy as the arm of the crown has a strong belief that they are slightly above the law.
Recovery of arrears has been a controversial issue in the Central Excise and Customs department.
This is how the story begins: - A unit is started with a loan from institutions like the State Finance Corporation. After some time the unit becomes sick. – Sick of everything – major reasons for the sickness would be excessive activism of a multitude of government agencies of this welfare state. In the meantime after a couple of Audit parties, preventive parties, Show Cause Notices and adjudication, arrears are born and by the time the Central Excise officer goes to serve the adjudication order, he is informed that the unit is closed, taken over by the SFC and sold. After a while the new owner comes for registration and then the department demands the dues of the old unit from him.
Normally the last one to know about the sale of a unit by the financial institutions is the Central Excise department. After having failed in various High Courts and Supreme Court to recover the arrears, finally the law was amended with a proviso to Section 11 in 2004 by which the department can now recover arrears from even the successors of the defaulting units. After the 2004 amendment, attachment orders are issued left right and centre.
This is what happens. A unit is sick and then dead. It has alleged arrears to Central Excise department. The unit is taken over by the bank and sold. A new entrepreneur starts his business with new hopes in the premises of the old defaulter. He would provide employment to several people, pay a lot of excise duty, but excise department will not allow this. They will pounce on him and attach his property because some unknown person who was running the factory in the same premises had run away and the department could not catch him!
But in hasty law making, the department had forgotten about the existence of other laws in the country. It is now established law that to recover dues, you need to create a charge and the first charge is created in favour of the bank that has given a loan – your crown not withstanding.
The issue was once again tested in the Madras High Court last week when a Larger Bench held that
(i) Generally, the dues to Government, i.e., tax, duties, etc. (Crown's debts) get priority over ordinary debts.
(ii) Only when there is a specific provision in the statute claiming "first charge" over the property, the Crown's debt is entitled to have priority over the claim of others.
(iii) Since there is no specific provision claiming "first charge" in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditor, viz., the Bank.
(iv) In the absence of such specific provision in the Central Excise Act as well as in Customs Act, the claim of secured creditor will prevail over Crown's debts.
So whatever you do, it is the bank which has given a loan that has precedence over the department and the attachment of property of the successor is patently illegal.