CERSAI-registered dues of a secured creditor would rank superior to the dues of State taxes: HC

The petitioners who are secured creditors submitted that due to amendments in the RDDB Act and SARFAESI Act, they are entitled to assert priority over claims of the State sales tax department under MVAT Act. State Legislations would yield to Central Acts creating the first charge. The State submitted that section 26E merely provides for ‘priority’ of payment and doesn’t create a ‘first charge’ in favour of the secured creditors.

The Court noted that both RDDB 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 to the Central Government. Thus, the rights of the first charge holders accorded by several State legislations would be subordinate to the right of the secured creditor.

Further, the court stated that RDDB Act and SARFAESI Act being Central Acts, will prevail over State Legislation in case any inconsistency between the Central Acts and State Legislation cannot be reconciled.

The court held that, “the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the IBC would rank superior to the dues of the relevant department of the State Government.

The Court stated 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., January 24 2020.

The petitioners submitted that even if section 26E of the SARFAESI Act is not applicable without CERSAI registration, the secured creditors are entitled to the statutory priority under section 31B of the RDDB Act.

The court rejected the contention and held that, “a secured creditor, finding that it is disabled from obtaining the benefit of ‘priority’ in terms of section 26E of the SARFAESI Act for want of CERSAI registration, cannot fall back on section 31B of the RDDB Act to claim ‘priority’.

Further, the court said that section 31B of the RDDB Act being a substantive provision, cannot be invoked by a secured creditor faced with the disability posed by section 26E of the SARFAESI Act.

The State contended that registration of the security interest is a pre-requisite for invoking section 26E of the SARFAESI Act. Section 26E does not come into effect without registration.

The Court held that, “unless the security interest is registered, neither can the borrower seek enforcement invoking the provisions of Chapter III of the SARFAESI Act nor does the question of priority in payment would arise without such registration”.

Further, the views expressed by the Division Benches in ASREC (India) Ltd. and State Bank of India, as discussed above, on the question under consideration are not the correct exposition of law and, to that extent, stand overruled.

The Court held that the priority under RDDB Act and SARFAESI Act wouldn’t apply if the immovable property of the defaulter is attached and a proclamation issued in accordance with law before Chapter IV-A of the SARFAESI Act or section 31B of the RDDB Act were enforced.

The Court held that with the insertion of section 26B in the SARFAESI Act read with the 2011 Rules, a secured creditor is expected to know some of such encumbrances if at all compliance of section 26B is resorted to by the Central Government, any State Government or a local authority, to whom money is owed by the defaulter being an owner of the property.

Such a statutory mechanism for knowing the encumbrances in respect of the immovable property being put up for sale by auction not being available before 24th January 2020, the authorized officers were found to play it safe by inserting the “as is where is, whatever there is basis” clause in the sale advertisement.

In view of the above, the Bombay High Court concluded that the dues of a secured creditor would rank superior to the dues of a State government department on the sale of the secured asset.