Secured Creditors to have priority over all debts and Government dues- Madras High Court

In a recent Judgment[1] Hon’ble Madras High Court held that in view of the newly introduced Section 26E[2] of the SARFAESI Act and Section 31B of the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the rights of a secured creditor to realise debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. The law would govern the rights of the parties in respect of matters lis pendens.

The Revenue had claimed priority over moneys, which have been received by the petitioner Bank upon sale of the mortgaged properties under SARFAESI Act. The stand of Revenue is that a prior statutory charge is created in its favour by virtue of the provisions Section 42(1) and Section 43 of the Tamil Nadu Value Added Tax, 2006.

High Court held that there is, thus, no doubt that the rights of a secured creditor to realise debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues. This section introduced in the Central Act is with "notwithstanding" clause and has come into force from 01.09.2016.

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[1] SBI v Asst. Commissioner (MANU/TN/3619/2016)

[2] "26E. Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

Explanation.--For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."