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JC - Legal Updates - Dues of a secured creditor supersedes dues of a state government department

Legal Updates

29 Sep 2022

Dues of a secured creditor supersedes dues of a state government department

Brief Overview:

The Bombay High Court (“the Court”) In the matter of Jalgaon Janta Sahakari Bank Ltd. V. Joint Commissioner of Sales Tax, dated 30th August 2022, held that "the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I&B code would rank superior to the dues of the relevant department of the state government".

Technical Details:

A batch of writ petitions were filed by various banks and NBFCs, upon insertion of Chapter IV-A in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (“SARFAESI Act”) which provides for registration by secured creditors and other creditors, and section 31B in the Recovery of Debts And Bankruptcy Act, 1993 (“RDB Act”)which provides for priority to secured creditors.

The Petitioner herein had filed a petition seeking priority with respect of two flats mortgaged to it as a secured creditor over the Sales Tax Authorities.

The State submitted that section 26E of the SARFAESI Act merely provides for 'priority to secured creditors' of payment and doesn't create 'first charge' in favour of the secured creditors.

The Court noted that both RDB Act and SARFAESI Act provide that the dues of a secured creditor will take precedence over debts and revenues, taxes, cesses and other rates payable not only to State Government and local authority but also the Central Government.

It was inter alia observed by the Court that;-

●  the provisions of Chapter IV-A of the SARFAESI Act would have application prospectively from the date the same was brought into force, i.e., 24th January 2020;

●  without recourse having been taken to the procedure envisaged in the RDB Act for recovery of its dues and without there being a determination of its claim by the DRT to the effect that any sum due from the borrower is payable to it, a secured creditor is not entitled to invoke the provisions of section 31B of the RDB Act; and

●  if the immovable property of the defaulter is shown to have been attached in accordance with law prior to Chapter IV-A of the SARFAESI Act, or for that matter section 31B of the RDB Act, being enforced, and such attachment is followed by a proclamation according to law, the ‘priority’ accorded by section 26E SARFAESI Act, and section 31B RDB Act, would not get attracted.

Interestingly, on the issue of the treatment of statutory dues under the Insolvency and Bankruptcy Code, 2016 (“IBC”), the Hon’ble Supreme Court in State Tax Officer Vs. Rainbow Papers Limited, 2022 SCC OnLine SC 1162, decided on 6th September 2022, has held that that if a resolution plan excludes statutory dues payable to government or a government authority, it cannot be said to be in conformity to the provisions of IBC.

Both the above judgments do not overlap as the former deals with the position of the statutory dues under the SARFAESI Act / RDB Act while the latter clarifies the position under IBC.

For further details, please see: Jalgaon Janta Sahakari Bank Ltd. V. Joint Commissioner of Sales Tax, Bombay High Court dated 30th August 2022, BHC

For any queries / clarifications, please feel free to ping us and we will be happy to chat:

●  Jayesh H (jayesh.h@jclex.com)

●  Smriti Jha (smriti.jha@jclex.com)