Considering the continuous evolution of the financial regulations of India, the rights of the secured creditors/ banks have drawn much importance. With an intention to further strengthen the rights of the secured creditors and provide priority to the secured creditors to recover their secured debts over all other debts and all revenues, taxes, cesses and other rates payable to the Government, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) was amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Previsions (Amendment) Act, 2016^[1], which inserted a non-obstante provision, Section 26E (Priority to Secured Creditors) to the SARFAESI Act that provides for payment to secured creditors in priority over all other debts. The relevant excerpt of Section 26E of the SARFAESI is extracted hereinbelow:

“Section. 26E- Priority to secured creditors

Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.”

Echoing the aforesaid principle of law, recently the Hon’ble High Court of Gujarat at Ahmedabad (“Guj HC”) in the matter of ‘Madhaviben Jitendrabhai Rupareliya v. State of Gujarat in the Special Civil Application No.9565 of 2023‘, has reaffirmed the precedence of secured creditors dues over all other dues.

Key Facts: In the present matter, the Guj HC was considering different petitions filed by the bonafide purchasers (being the petitioners) of various properties which were put to auction upon default in repayment of loan committed by their predecessors in title. The petitioners herein are the successful bidders, who had paid the bid amount and purchased the property as successful bidder. A common grievance of all the petitioners is that their name in the revenue record is not being mutated on the ground that there is an outstanding charge registered in favour of the tax department/ Government on account of non-payment of certain dues. Hence, the primary issue that the Guj HC delved into was, inter alia, related to who will have first charge over the property i.e., secured creditor or the State/ Central Government on account of non-payment of dues of sales tax department.

The petitioners asserted inter alia that they have purchased the property in question by way of public auction conducted in accordance with law and refusal by the respondents to mutate the name of the petitioners (being the successful bidders) in the revenue record is contrary to law and hence, illegal. According to the petitioners, Section 26E of the SARFAESI Act is the settled proposition of law, which provides priority to the secured creditors over the claim of the unsecured creditors. It was also the contention of the petitioners that the sales tax department can recover their dues through alternative forums, if available, as per law but for such reason the bonafide purchasers cannot be penalised.

The assertion of the respondent was based on the issue inter alia that under (i) Section 13(7) of the SARFAESI, it is the statutory duty of the bank to discharge its dues and utilise the residue money so received for payment to the person/ department against whom there is a valid outstanding amount; and (ii) Rule 9(7) of the Security Interest (Enforcement) Rules, 2002, the authorised officer is required to allow the purchaser to deposit the required monies to discharge encumbrances, interest, costs and expenses, before finalising the sale in favour of the auction purchaser. The respondents also asserted that since the auction was held on ‘as is where is whatever there is basis‘, the right of the authorities with respect to the charge is not lost.

Judicial Precedents: The Guj HC has relied upon its decisions in the matter of ‘M/s Mahadev Cotton Industries v. Department of Central Sales Tax, 2023 (0) AIJEL -HC 245523‘, ‘Odhavjibhai Mohanbhai Gadhiya v. State of Gujarat and others, Special Civil Application No. 9394 of 2021‘ and ‘Vinod Realties Private Limited v. State of Gujarat and others, Special Civil Application No. 7807 of 2011‘, wherein the Guj HC has held inter alia the following:

• Considering the law laid down by Guj HC as well as by the Supreme Court (“SC”) and also keeping in mind the provisions of Section 26E of the SARFAESI Act, the debts due to a secured creditor shall be paid in priority over other debts/ taxes payable to the State Government.
• The purchaser has no concern with the dues of the State Authorities which is of the erstwhile owner. The purchaser has paid full and final sale consideration to the Bank and if the State Authorities have dispute qua their dues, they can avail appropriate legal remedy against the appropriate persons.
• The settled position of law is that the VAT and sales tax dues has no precedence over the dues of the bank for recovery of which the bank exercise powers under the SARFAESI Act. The bank was secured creditor. Section 26E of the SARFAESI Act provides for priority of secured creditor.

Further, the Guj HC also relied upon the decision of the SC in the matter of ‘Punjab National Bank v. Union of India and others (2022) 7 SCC 260‘, wherein the SC has held that ‘where the land, building, plant machinery, etc. have been mortgaged/ hypothecated to a secured creditor, having regard to the provisions contained in Section 2 (zc) to (zf) of  SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI Act, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, Section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.‘

Decision of Guj HC: The Guj HC, relying on its earlier decisions and also, the decision of the SC as mentioned hereinabove and the legislative framework of the SARFAESI Act, held that the secured creditor shall have priority to recover its secured debts against any charges of the State Government or Central Government and will have first charge over the property against the Crowns debt. Consequently, the Guj HC directed the respondent to mutate the names of each of the petitioners in the revenue records by setting aside any charge over the property created by the State or its authorities, as there was a first charge of the secured creditor.

Some Thoughts:

The Guj HC decision is of great importance as the court has not only reiterated the well settled principle of law providing priority of rights to the secured creditors over the unsecured creditors but has also emphasized that secured creditors would have priority over crown debt i.e., debts due to the State. Considering the legislative framework of Section 26E of the SARFAESI Act, there seems to be no doubt that the rights of the secured creditor in respect of their secured debt prevails over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. The enactment of the non-obstante framework of Section 26E of the SARFAESI Act and the recent decision of the Guj HC observing priority of rights of the secured creditors are favourable for secured creditors and would definitely be seen as providing a robust framework to the secured creditors in relation to recovery of their secured debts.

In our view, the reiteration and reinforcement of the rights of the secured creditors would definitely encourage the secured creditors/ banks/ venture debt funds and boost their confidence in the law of the land, which entitles them to recover their secured debts over all other debts. It is important to note that this is not the first judicial precedent that emphasises on the priority of rights of the secured creditor over unsecured creditor but the courts across jurisdictions have recognised the well settled principle of law.

We will keep examining this issue as it will certainly keep unfolding itself in time to come. Watch this space for more…

Endnote:

^[1] w.e.f. 24.01.2020.