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The recent years have witnessed a steep rise in affirmation of the fact that secured creditors have greater rights to recover their debts when compared to those who claim from the Government by the Indian Judiciary. This change amongst the legal precedents, especially under the Insolvency and Bankruptcy Code (IBC), 2016, has a bearing on such cases by emphasizing on priority of secured creditors over government dues like taxes and statutory levies. The rulings highlight the fact that, in terms of priority distribution of assets during insolvency resolving process and debt recovery process, IBC’s waterfall mechanism comes first thus giving acceptance among different categories of lenders.
The rights of secured creditors to realize secured debts shall have priority over all other debts and government dues. It specifically mentions that this priority is established under Section 31B of the Insolvency and Bankruptcy Code, 2016, which takes precedence over other laws.
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State Bank Of India Through Its Chief Manager, Mr. Jagdish Mohan Nakade v. State Of Maharashtra, Through Finance Department And Others (Bombay High Court, 2020).
In the High Court, a petitioner who was a secured creditor sought to penetrate into the proceedings to show that there is a priority claim over the Sales Tax department’s claim on a certain property about its secured debt .
On July 17, 2019 an e-auction was conducted but then it was canceled. It was claimed by the petitioner that there was no claim of priority by this Department over his mortgage which was made on January 13,2014.Respondents argued(justification)that the state had the first charge on this property under Section 37 of Maharashtra Value Added Tax (MVAT) Act.
The ruling was done by the High Court in favor of the Petitioner affirming him/her as a secured creditor as against the claim from sales tax department. This was because bipartisan reasons were given to support such claims under statutory provisions like Section 31-B of the RDB act and section 26-E of SARFAESI Act. The RDB ACT amendment that became active on September 2nd , 2016 thus favors secured creditors over state claims. Justices have ruled that, as per law.
It is not by chronological order of attachment that order of debt is defined. Hence, an encumbrance placed by the applicant will take precedence over that claimed by the Sales Tax Office.
The rights of secured creditors to realize debts through the sale of mortgaged assets take precedence over all other debts and government dues.
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ICICI Bank Limited v. The Assistant Commissioner of Income Tax (Madras High Court, 2024
Facts – Challenging an attachment of property got to recover taxes for 2017-18, is the Petitioner, who is a secured creditor. The security interests held by this petitioner under section 26E of SARFAESI Act 2002 take precedence over claims for tax. The petitioner argues that under section 26E that there should be an order for removal of the attachment and registration of sale certificate for the mortgaged property created in 2016, as their priority is greater than that of income tax authorities.
Judgement – This decision was made, the petitioner states, despite the fact that the secured creditor’s priority charge under section 26E of the SARFAESI Act 2002, has precedence over claims by sales tax, commercial tax and income tax authorities. The enforcement order issued by tax authorities was set aside by court, thereby allowing the petitioner who has a registered security interest to exercise his rights on the mortgaged property without any interference from tax claims. Consequently, the court directed the removal of the attachment and allowed registration of a sale certificate.
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The secured creditors have a priority charge over the claims of Sales Tax, Commercial Tax, and Income Tax.
Indian Overseas Bank vs The Assisstant Commissioner
In this case SECURED CREDITORS verses CROWN DEBT the Bombay High Court deliberated upon the priority of charge between secured creditors and government tax claims. The secured creditors relied on Section 26E as per (SARFAESI Act) to assert their priority over Sales Tax, Commercial Tax and Income Tax dues. The Additional Advocate General contended that crown debts should take precedence.
Relying upon full bench principle authorities, it was held by the Court that indeed secured creditors have precedence over such tax claims arguing that before tax dues only can be satisfied. It also indicated clearly that, secured lenders should remit any extra amounts received in excess of what they required to pay to tax departments but not for any excessive non-received amounts for which they shall not be liable and could never be prosecuted for failure to pay cooperation with these expenses which are not theirs.
The resolution plan’s distribution mechanism does not allow for inter-se classification of secured creditors.
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Technology Development Board v. Anil Goel Liquidator of Gujarat Oleo Chem Ltd & Ors (National Company Law Appellate Tribunal, 2021)
Regarding the appeal on the sub-classification of secured creditors in the winding up process of Gujarat Oleo Chem Ltd, claims distribution among secured creditors was the issue addressed by National Company Law Tribunal (NCLT), Ahmadabad Bench. T
he Appellant being part of the Committee of Creditors (CoC) with a 14.54% voting share filed a claim against Rs 24,78,68,595 with the Liquidator who for over one year did not call a creditors’ meeting. The claims of Appellant were not considered in the distribution of sale proceeds by the Liquidator to like ‘Stressed Asset Stabilisation Fund’ and others like ‘Gujarat State Finance Corporation’ both of whom were security charge holders.
This made Appellant contest the mechanism for distribution maintaining that it was inconsistent with Insolvency and Bankruptcy Code, 2016 and creditors ought to be ranked based on their class and type of security held under section 48 of Transfer of Property Act.
The Tribunal ruled in favor of the Appellant noting that sections 52 and 53 supported differences between realizing security interests from distributions proceeds hence allowing sub-classifications among secured creditors. It emphasized on first charge holders right not being denied in line with what the Apex Court had said regarding such preferences during liquidation situations.
Whether the State Excise and Taxation Department has priority over the secured creditors’ debts.
STATE OF HP AND OTHERS v. M/S ACACIA TRADERS
The case between the State Excise and Taxation Department and secured creditors turned on the question whether the state’s tax claims took precedence over debts owed to secured creditors, that is, a bank. The State contended that under the Central Excise Act, 1944 and other relevant state laws, they had a first charge on all properties within its jurisdiction. In contrast, the bank argued that its rights as a secured creditor under Section 26E of SARFAESI Act, 2002 which confers privileges upon secured creditors should take precedence over the claims from the state.
The court ruled that provisions in SARFAESI Act 2002 giving privileges to those with security are paramount above those in Central Excise Act auctioning out out-dated ruling for old taxes owed by the state itself. The appeals were dismissed confirming that claims lodged by secured creditors hold more water than those instituted by the Government seeking tax revenue justifying its stand on priority aspects.
FAQs
Do secured creditors have upper hand?
The secured creditors have greater rights to recover their debts when compared to those who claim from the Government by the Indian Judiciary.
