Secured Creditor Priority: High Court Rules Bank Charges Override State Tax Claims Under SARFAESI Act

In a significant ruling for financial institutions, the High Court of Punjab & Haryana has clarified that the interests of a secured creditor under the SARFAESI Act take precedence over the tax claims of state authorities. The judgment brings much-needed clarity to the conflict between statutory debt recovery and state revenue attachments.

The Backdrop: A Dispute Over Auction Credentials

The case arose when the State Bank of India (SBI) found itself unable to finalize the sale of a mortgaged property despite successfully concluding an e-auction in September 2021. The borrower, M/s Mahavir Cereals, had defaulted on a credit facility granted back in 2013. While the bank had held the title deeds as security for years, the Sub-Registrar of Nigdhu refused to register the sale deed, citing an attachment order issued by the District Food and Supply Department in 2018 for outstanding tax dues.

The bank challenged this inaction, arguing that its security interest—established in 2013—fundamentally superseded any subsequent tax claims by the state government.

The Legal Tug-of-War

The core legal question before Chief Justice Sheel Nagu and Justice Sanjiv Berry was one of priority: Does a state government's tax claim, recorded via a revenue entry, override the prior mortgage of a bank?

The state contended that the property carried a charge related to dues arising from Custom Milling Agreements. However, the Court observed that the state failed to identify any statute that granted their claim a "first charge" status over the property.

In contrast, the Bank invoked the principles of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Even though the specific provision regarding priority (Section 26E) was notified later, the Court held that the legal principle remains constant: a secured creditor’s right to recover debts holds supremacy over state revenue claims.

Key Observations

The High Court emphasized that administrative revenue entries cannot be used to defeat the substantive rights of a secured mortgagee. The Court highlighted:

• On the bank's priority: "The right of a secured creditor to recover its debts, will always be a prior right, even over the right of recovery of a crown debt or any other debt."
• On the status of revenue records: "The rapat entry itself does not decide rights of parties, it is merely an administrative note and cannot defeat a prior statutory right of mortgage of petitioner Bank."
• On statutory intent: "Before parting, we feel it apt to mention that there are lot many litigations involving the question of priority of charge... it is made clear that in such cases, 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."

The Verdict and Its Ripple Effects

The High Court issued a Writ of Mandamus directing the Sub-Registrar to register the sale deed in favor of the auction purchaser within two months. Furthermore, the Court exercised its power of Certiorari to quash the revenue entry created by the District Food and Supply Department.

While the State of Haryana retains the liberty to recover its dues after the bank’s debts are satisfied, the judgment serves as a stern reminder that the recovery process under the SARFAESI Act cannot be derailed by subsequent, non-statutory government claims. By leveling a cost of Rs. 25,000 against the state for unwarranted delays, the Court has signaled that impediments to the liquidation of secured assets will not be viewed favorably.

This decision strengthens the confidence of secured creditors in the enforceability of their security interests, ensuring that state revenue departments cannot easily stall the resolution of non-performing assets.