SARFAESI secured creditors’ priority overrides subsequent State VAT charges on secured assets.

Raffles Green Pet India Private Limited obtained credit facilities from the Bank of Baroda, secured by mortgages over several properties, including Revenue Survey No. 782-2, Khata No. 1474, situated at Village Pithai, Taluka Kathlal, District Kheda (“subject property”).

The borrower defaulted, and the Bank auctioned the subject property under the SARFAESI Act, 2002. The petitioners became successful bidders in the e-auction held on 24 February 2021 and received a sale certificate dated 9 August 2021, which was registered on 22 September 2021.

The petitioners subsequently sold the subject property to Spartex Synthetics Private Limited, respondent no. 6, through a registered sale deed dated 14 February 2022.

The State VAT Department had passed an attachment order dated 24 January 2022, and a charge was subsequently recorded in the revenue records through Mutation Entry No. 12724, certified on 10 May 2022.

The petitioners challenged the attachment order and Mutation Entry No. 12724 under Article 226 of the Constitution, asserting that the Bank’s secured interest and the SARFAESI auction sale had priority over the State VAT Department’s claim.

Whether the charge created by the State VAT Department and recorded through Mutation Entry No. 12724 could prevail over the secured creditor’s prior mortgage and the subsequent SARFAESI auction sale?

Whether the attachment order dated 24 January 2022 and Mutation Entry No. 12724 were liable to be quashed and removed from the revenue records?

Whether the petitioners, as auction purchasers under the SARFAESI Act, acquired priority over the State VAT Department’s claim under Section 26E of the SARFAESI Act?

The Court applied Section 26E of the SARFAESI Act, 2002, which, notwithstanding anything contained in any other law, gives debts due to a secured creditor priority over all other debts and Government revenues, taxes, cesses and other dues after registration of the security interest.

Section 26E was brought into force with effect from 1 September 2016.

The Court also relied on the overriding effect of the SARFAESI Act under Section 35, the statutory framework concerning secured assets under Sections 2(zc)–(zf) and Section 13, and the corresponding priority provision under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993.

Relying on Punjab National Bank v. Union of India, Civil Appeal No. 2196 of 2012, decided on 24 February 2022, and Kalupur Commercial Cooperative Bank Ltd. v. State of Gujarat, 2020 (1) GLR 625, the Court held that a secured creditor’s claim takes precedence over State dues, including statutory tax claims.

The Court also referred to Connectwell Industries Pvt. Ltd. v. Union of India, (2020) 5 SCC 373, for the principle that secured debts ordinarily prevail over Crown debts unless a statute expressly provides otherwise.

The Bank’s mortgage and secured interest in the subject property pre-dated the State VAT Department’s attachment and mutation entry.

The petitioners acquired the property through a SARFAESI auction and received a registered sale certificate on 9 August 2021, whereas the VAT charge was certified only on 10 May 2022.

Applying Section 26E of the SARFAESI Act and the principles laid down in Punjab National Bank and Kalupur Commercial Cooperative Bank, the Court held that the Bank’s secured interest and the rights flowing from the SARFAESI sale had priority over the subsequent VAT charge.

Since the State’s charge could not override the secured creditor’s prior interest, the consequential mutation entry recording that charge was legally unsustainable.

Mutation Entry No. 12724, recording the VAT charge over Revenue Survey No. 782-2, Khata No. 1474, admeasuring 8,977 square metres at Village Pithai, Taluka Kathlal, District Kheda, was directed to be removed from the revenue records within twelve weeks of receipt of the order.

The Rule was made absolute, and direct service was permitted.