SARFAESI Charge Created Before GST Charge Takes Precedence Over It: Karnataka High Court

The Karnataka High Court held that a SARFAESI charge created prior in time takes precedence over a GST Charge. Justice Suraj Govindaraj stated that if there is a conflict between the GST Act and the SARFAESI Act (or the RDB Act), the priority of the charge must be determined based on the order in which the charges were created. If the charge under the GST Act was created prior to that under the SARFAESI Act, the GST Act will prevail, and vice versa. In this case, the petitioner/Canara Bank contends that Respondents No. 4 and 5 had availed a mortgage loan from the petitioner bank for their partnership concern. As regards the residential flat, it was provided as security for the loan. The loan became a non-performing asset on 01.12.2020. A notice under Subsection (2) of Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was issued, calling upon Respondents No. 4 and 5 to clear the outstanding loan amount of Rs. 42,09,855/- as of 31.10.2022. Since Respondents No. 4 and 5 did not repay the loan, a notice under Subsection (4) of Section 13 of the SARFAESI Act was issued on 24.05.2024. At this stage, it came to light that Respondents No. 4 and 5 also owed certain amounts to the Commercial Taxes Department as GST to the tune of Rs. 1,38,25,684/-. Respondent No.1 recovered Rs. 80,54,200/- by sale of various assets but also created a charge/encumbrance on the apartment, which was duly entered in the property card of the apartment. The petitioner bank contends that it had a prior charge and issued a notice on 17.11.2024, to Respondents No. 2 and 3 stating that the said property is secured and possession thereof had been taken in terms of the SARFAESI Act. The liability of Respondents No. 4 and 5 towards the Bank is to the extent of Rs. 1,07,80,517/-. The petitioner argued that any encumbrance or charge under the SARFAESI Act has precedence and preference over the charge of any other authority, including taxing authorities and governmental authorities, until and unless a charge of the secured creditor is discharged, no other authority or entity, including taxing authorities, can claim any interest in a secured asset offered as security towards a loan disbursed by a bank. The respondents submitted that the GST Act, being a central enactment applicable to both CGST and SGST, and the SARFAESI Act, also being a central enactment, the GST Act, being the subsequent enactment, would prevail over the earlier SARFAESI Act. The issue before the bench was who would have preference or priority of charge/encumbrance by reading the SARFAESI Act and the GST Act in conjunction. The bench, after evaluating the provisions of the GST and SARFAESI Act, noted that if a claim is made by the Bank under either the SARFAESI Act or the RDB Act, and there is no claim under the IBC or GST Act, it is clear that the claim under the SARFAESI Act or the RDB Act may be enforced. If a claim is made under the IBC Act and there is no claim under the SARFAESI Act, RDB Act, or GST Act, the claim under the IBC Act can be implemented without issue. Similarly, if a claim is made under the GST Act and there are no claims under the SARFAESI Act, RDB Act, or IBC Act, the claim under the GST Act can be executed without difficulty, added the bench. The bench held that if the charge under the SARFAESI Act was created before the charge under the GST Act, the SARFAESI Act charge would take precedence. Regardless of the date of the order or the date of recordal, the fact remains that the charge in favour of the Bank was recorded on 15-07-2017, which is more than two years prior to the charge created by the GST authorities, as noted by the bench. In light of the above, and based on the timeline of events as outlined, the bench held that in the present case, the Bank's charge takes precedence over that of the GST authorities. The bench allowed the petition. Case Title: The Canara Bank v. The State of Karnataka Case Number: WRIT PETITION NO. 103730 OF 2025 (GM-RES) Counsel for Petitioner/Assessee: Santosh Kumar B. Malligawad and B. Dinkar Shetty Counsel for Respondent/Department: Sharad V. Magadum Click Here To Read/Download The Order

SARFAESI Charge Created Before GST Charge Takes Precedence Over It: Karnataka High Court

Mehak Dhiman

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