A secured creditor’s priority under Section 26E of SARFAESI prevails over State VAT charges.

The borrower, M/s. Labh Solvex LLP, mortgaged three properties to the State Bank of India on 5 March 2022 to secure credit facilities; the Bank registered its security interest with CERSAI on the same date.

After the loan account was classified as an NPA, the Bank initiated enforcement under the SARFAESI Act and obtained an order under Section 14 for possession of the secured properties.

While preparing to auction the properties, the Bank discovered that the State Tax Department had registered a charge of ₹1,21,40,961 over them. The Bank’s request to remove the charge was not acted upon, leading it to seek relief under Article 226 of the Constitution.

Whether the Bank’s security interest over the mortgaged properties has priority over the State Tax Department’s charge under Section 48 of the Gujarat Value Added Tax Act, 2003.

Whether the State Tax Department’s charge should be removed from the revenue records and the Bank’s first charge over the properties declared.

Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), inserted with effect from 1 September 2016, provide priority to secured creditors’ debts over other debts and Government dues, notwithstanding contrary provisions in other laws.

Section 48 of the Gujarat VAT Act provides for a State charge in respect of tax, interest, or penalty payable by a dealer; as explained in the precedent relied upon by the Court, that provision operates once the liability has been assessed and the amount determined as payable.

The Court followed the reasoning in Special Civil Application No. 17891 of 2018 and referred to Bank of Baroda v. State of Gujarat & Ors., Special Civil Application No. 12995 of 2018, decided 16 September 2019.

The Bank’s mortgage and CERSAI registration predated the State Tax Department’s recorded charge, and the Bank had proceeded to enforce its security under the SARFAESI Act.

Applying Sections 26E and 31B and the precedent concerning Section 48 of the Gujarat VAT Act, the Court held that the secured creditor’s priority prevailed over the State’s claim in relation to the secured assets.

It accordingly concluded that the State Tax Department’s charge could not remain on the properties to defeat the Bank’s priority.

Any excess proceeds were to be adjusted towards the State’s VAT dues, and the State was barred from proceeding against purchasers of properties sold under the SARFAESI Act.

Rule was made absolute, with no order as to costs.