Secured Creditors Shall Take Priority Over Government Dues Under SARFAESI Act: Bombay High Court

The three judge bench headed by Chief Justice Dipankar Dutta, Justice M.S.Karnik and Justice N.J. Jamadar has observed that the Sales Tax Commissioners did not claim that they registered the claim with the CERSAI to adhere to the mandate contained in section 26B(4) of the SARFAESI Act. Non-registration of the claim and/or order of attachment entails the consequences envisaged under section 26C (2) of the SARFAESI Act. Thus, dual disability sets in. Firstly, in the absence of material to show that the first charge under section 37 of the MVAT Act was enforced by a valid attachment order before the registration of security interest by the petitioner/secured creditors with the CERSAI, the petitioner cannot be deprived of the right of priority under section 26E of the SARFAESI Act. Secondly, with the registration of the security interest with the CERSAI on July 9, 2020, coupled with the absence of registration of the department's demand and order of attachment, the claim of the respondents/department becomes subservient to the right of the secured creditor.

The issue raised was who, between a secured creditor and the taxing/revenue departments of the Central or State governments, can legally claim priority for liquidation of their respective dues qua the borrower/dealer upon enforcement of the "security interest".

The secured creditors/petitioners contended that the priority created by section 31B is not restricted to enforcement under the Recovery of Debts and Bankruptcy Act, 1993 (RDDB Act); section 31B recognises priority generally. As per Section 26E, priority is also recognised by the SARFAESI Act.

The petitioners contended that in view of amendments brought in both the RDDB Act and the SARFAESI Act, the secured creditors are entitled to assert priority over claims of the State sales tax department under the MVAT Act under section 31B of the RDDB Act and section 26E of the SARFAESI Act.

The petitioners contended that the secured debt of the secured creditors would have priority over any first charge created by the MVAT Act in favour of the relevant department of the government. It is because the statutory priority accorded to secured creditors is the same as the creation of first charge and the very enactment under which the department claims its right, recognises the primacy of provisions in Central Acts regarding the creation of priority in charge.

The petitioner submitted that in the event the court holds that section 26E of the SARFAESI Act is not applicable without registration of the security interest, the secured creditors are entitled to the reliefs claimed on account of the statutory priority of charge accorded to them in terms of section 31B of the RDDB Act.

The respondents contended that the state has a statutory charge on the property of the dealer which the sales tax authorities are entitled to enforce by exercising the right to attach and sell the same for recovery of its outstanding dues notwithstanding the introduction of section 26E in the SARFAESI Act and section 31B in the RDDB Act.

The respondents contended that Section 26E of the SARFAESI Act and Section 31B of the RDDB Act do not create any charge in favour of the secured creditor but merely provide for 'priority' in payment. More importantly, such provisions do not negate or nullify the statutory charge created under the MVAT Act or the MLR Code.

The court held that the dues of a secured creditor (subject, of course, to CERSAI registration) and subject to proceedings under the Insolvency & Bankruptcy Code would rank superior to the dues of the relevant department of the State Government.

Case Title: Jalgaon Janta Sahakari Bank Ltd. Versus Joint Commissioner of Sales Tax Nodal 9

Case No: W.P. No. 2935 Of 2018

Date: 30.08.2022

Counsel For Petitioner: Advocate Rajiv Narula

Counsel For Respondent: Advocate Karan Adik

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