Under SARFAESI & RDB Acts, Dues Of Secured Creditors Take Precedence Over Govt Dues: Allahabad High Court

The Allahabad High Court has held that under Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, the debts of the secured creditors will take precedence over all over debts including crown debts.The bench of Justice Shekhar B. Saraf and Justice Praveen Kumar Giri held “Upon a perusal of the judgments cited above, the first principle that emerges is that a secured crediter shall always have precedence over an unsecured creditor. Seconly, in cases where two enactments refer to secured creditors having charge over the property, the later enactment would prevail.”Referring to the judgment of the Supreme Court in Kotak Mahindra Bank Limited v. Girnar Corrugators Private Limited and Others, the Court held “it is crystal clear that the priority conferred under Section 26-E of the SARFAESI Act that came into existence in 2016 would prevail over an unsecured creditor even though the unsecured creditor is the Government.” Bank of Baroda sanctioned a loan of Rs. 30 lakhs to M/s L.G. Corporation, a proprietorship firm owned by one Smt. Geeta Devi against which the property in question had been mortgaged. Due to defaults, the account was declared as Non-Performing Asset (NPA) and proceedings under SARFAESI Act were initiated by the Bank. Since the borrower had failed to pay the same in the stipulated time, Bank sent out a possession notice and took symbolic possession of the property. Thereafter, in Section 14 application, Additional District Magistrate (Finance and Revenue) passed an order to hand over the physical possession of the property to the Bank. During pendency of the execution, it was found that department of Food and Civil Supply, U.P., Jaunpur for the recovery of outstanding amount of Rs.54,75,499 and had already taken possession of the mortgaged property. Notices had also been issued by the commercial tax department for recovery of tax liability from the petitioner. After various rounds of litigation, petitioner challenged the order of the department of Food and Civil Supply, U.P., Jaunpur attaching the mortgaged property. The Court observed that the non-obstante clauses in Section 26-E of the SARFAESI Act and Section 31B of the RDB Act were added vide amendment in 2016 to give the secured creditors priority over unsecured creditors and the Government dues. It held that the non-obstante clause gave the provisions an overriding power over all other laws in existence. “The SARFAESI Act was purposefully enacted to regulate securitisation and reconstruction of financial assets and the enforcement of security interests and in furtherance to provide a central database of security interests created over the property rights. This act empowered the secured creditors to recover the dues by enforcing the security interest created in the secured assets without the intervention of the court or tribunal.”The Court observed that the loan taken by the borrower from Department of Food and Civil Supply which is a Department of the State Government is an unsecured loan, whereas the loan against the mortgage of property from the petitioner Bank is a secured loan. Referring to various judgments of the Apex Court, the bench headed by Justice Saraf held that secured dues take precedence over crown debts. Accordingly, the Court quashed the order of the Department of Food and Civil Supply for recovery of State dues. Case Title: Regional Stressed Asset Recovery Branch Bank Of Baroda V. State Of U.P And 9 Others [WRIT - C No. - 33632 of 2024]Click Here To Read/Download Order

Under SARFAESI & RDB Acts, Dues Of Secured Creditors Take Precedence Over Govt Dues: Allahabad High Court

Upasna Agrawal

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