Secured Creditors’ Priority Under Section 31B of RDB Act Overrides Statutory Charges and Government Dues

The petitioners purchased the subject land (Plot Nos. 1–12, Village Karanj, Surat) through a public e-auction conducted by the Recovery Officer-II, DRT-II, Ahmedabad, under the Recovery of Debts and Bankruptcy Act, 1993 ("RDB Act")

The land was originally mortgaged to respondent no. 4 (Bank) in 2006-2007 by M/s. Salasar Polyfab Pvt. Ltd. to secure debts exceeding ₹85 crores

The petitioners were declared highest bidders in August 2019, deposited the full consideration, and a registered sale deed was executed on 27.01.2020 following DRT confirmation

Despite a previous judgment in SCA No. 10314 of 2021 removing an Income Tax attachment, a new charge (Mutation Entry No. 5854) was created by the State VAT authorities (respondent no. 3) on 19.12.2020 for outstanding tax dues of the original borrower

1. Whether a statutory charge created under Section 48 of the Gujarat Value Added Tax Act, 2003, prevails over the security interest of a secured creditor under the RDB Act

2. Whether the respondent authorities are legally obligated to remove the revenue record entries regarding tax dues for a property sold via a DRT-authorized auction

The Court primarily applied Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, which grants secured creditors priority to realize debts via the sale of assets over all other debts and Government dues, including revenues, taxes, and cesses due to Central or State Governments

The Court relied on the Division Bench precedent in Kalupur Commercial Cooperative Bank Ltd. & Anr. v. State of Gujarat & Anr. (2020), which established that Section 31B is a substantive provision with a non-obstante clause that overrides state tax laws

It further referred to Punjab National Bank v. Union of India (2022) and Connectwell Industries Pvt. Ltd. v. Union of India (2020), affirming that secured creditors’ dues take preference over "Crown debts" unless a statute specifically dictates otherwise

The Court reasoned that the priority of the secured creditor (the Bank) was established the moment the security interest was created in 2006-2007, long before the VAT department attempted to attach the property in 2020

The Bench observed that Section 31B of the RDB Act, introduced via amendment in 2016, contains an express non-obstante clause intended by Parliament to give precedence to secured creditors over Government revenues

The Court noted that the petitioners, as bona fide auction purchasers under a central recovery statute, cannot be burdened by the tax liabilities of the previous owner

Applying the logic from the petitioners' previous litigation (SCA No. 10314 of 2021), the Court found that the VAT department's charge was legally unsustainable because the secured creditor’s right to recover precedes state tax claims by virtue of federal legislative intent

The Court ruled that secured creditors have absolute priority over government dues under Section 31B of the RDB Act

Consequently, the Court directed respondent nos. 1 to 3 to remove Mutation Entry No. 5854 and any other charges related to the original borrower’s tax dues from the revenue records of the subject land within twelve weeks; Rule was made absolute