The High Court ruled that the rights of secured creditors under Section 26E of the SARFAESI Act take precedence over Crown debts, affirming the priority of secured creditors' claims.
The Gujarat High Court Single-Judge Bench of Justice Nirzar S. Desai addressed multiple applications and ruled in favour of bona fide purchasers against the Sales Tax Department, affirming the priority of secured creditors' rights under the SARFAESI Act. The Court clarified that the rights of secured creditors under Section 26E of the SARFAESI Act take precedence over Crown debts, ensuring that bona fide auction purchasers receive unencumbered titles, as the SARFAESI Act overrides conflicting statutory claims by government authorities.
The High Court's judgment in this case addressed disputes regarding the precedence of charges on property between secured creditors (banks) and the State/Central Government for unpaid sales tax dues. The court examined whether the secured creditors' rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) would override the Crown’s debt claims. Hearing several consolidated petitions, the court considered facts from the lead case, Special Civil Application No. 12848 of 2023, as representative.
The petitioners, bona fide purchasers of properties sold via public auctions conducted by secured creditors, faced issues with mutation in revenue records. The properties, previously mortgaged to banks, bore charges recorded in favour of both the secured creditors and the Sales Tax Department. While the petitioners argued that secured creditors' rights under Section 26E of the SARFAESI Act superseded other claims, the State contested, citing the Crown’s priority principle. The petitioners relied on precedents such as Dena Bank v. Bhikhabhai Prabhudas Parekh and Others, REEDLAW 2000 SC 04201 and Punjab National Bank v. Union of India, REEDLAW 2022 SC 02205, asserting their legal title and the banks' priority under the SARFAESI Act.
The High Court ruled in favour of the petitioners, reaffirming that secured creditors' rights under Section 26E of the SARFAESI Act take precedence over Crown debts. The court observed that auction purchasers, having acquired properties through lawful means and sale certificates, held valid and unencumbered titles. Denial of mutation violated the principles of statutory priority and the rights of bona fide purchasers, effectively resulting in unjust enrichment for the State. The court directed authorities to quash the rejection orders, mutate the petitioners' names in the revenue records, and remove encumbrances related to tax dues.
This judgment strengthens the legal principle that claims under the SARFAESI Act override general statutory dues of the government unless explicitly stated otherwise. It safeguards the rights of bona fide purchasers, ensuring clarity and security in transactions involving properties sold through auctions by secured creditors. The case reinforces established precedents, affirming that the SARFAESI Act prevails over conflicting provisions of other laws, upholding the hierarchy of claims in favour of secured creditors.
Mr Monal S. Chaglani, Advocates represented the Petitioners.
Mr. Jay Trivedi, AGP appeared for Respondent Nos.1,2,3,5.
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