Secured Creditors would rank superior to the dues of State Government under SARFAESI Act: Bombay High Court

Secured Creditors would rank superior to the dues of State Government under SARFAESI Act: Bombay High Court

The three judge bench comprised of Chief Justice Dipankar Dutta, Justice M.S.Karnik and Justice N.J. Jamadar.

The Bombay High Court in the case of Jalgaon Janta Sahakari Bank Ltd. Versus Joint Commissioner of Sales Tax Nodal 9, Mumbai has ruled that rights of a secured creditor to realize secured debts shall have priority over government dues, including revenues, taxes, cesses, and rate due to the Central Government, State Government, or local authority under the SARFAESI Act.

It was observed by the Court that the Sales Tax commissioner 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 kicks in.

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.

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 under consideration 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 court held that the dues of a secured creditor (subject 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.