Bank’s “Secured Debts” Prevail Over Revenue’s “First Charge” in Property Recovery, SARFAESI and RDB Acts Override KGST and KVAT Act Claims: Kerala HC [Read Order]

The High Court of Kerala has held that banks and financial institutions hold priority over revenue authorities’ “First Charge” when recovering debts through property sales.

The decision came after the analysis of conflicting legal provisions in the dispute involving the State Bank of India (SBI), the State of Kerala and other concerned parties.

The case revolved around the complex interplay between the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, the Recovery of Debts and Bankruptcy (RDB) Act, 1993, the Kerala General Sales Tax (KGST) Act, 1963, and the Kerala Value Added Tax (KVAT) Act, 2003.

The core question being decided was whether the “First Charge” granted to revenue authorities for recovering tax arrears could override the priority granted to secured debts under the SARFAESI and RDB Acts.

The petitioners, SBI and other banks, represented by S Easwaran argued that they hold secured debts that should take priority over other claims, including taxes owed to the government.

The High Court upheld the argument put forth by the Petitioner, SBI, affirming that the introduction of Section 26E of the SARFAESI Act and Section 31B of the RDB Act established the supremacy of secured creditors’ rights when reclaiming their debts.

On the other hand, the Revenue authorities, representing the government, assert their “First Charge” over the properties for recovering tax arrears.

The respondent revenue contended that even though secured debts must be given priority in payment, their “First Charge” over the property should still take precedence.

The revenue emphasised that selling the property through mechanisms like SARFAESI Act or RDB Act won’t extinguish their “First Charge”, and the sale proceeds would be used to offset the secured debts first.

The bench, citing a series of legal precedents, underscored the fact that the concepts of “First Charge” and “Priority of payment” essentially granted the same prerogatives: the ability to recover dues ahead of other claimants.

The bench emphasised that the SARFAESI Act and RDB Act took precedence over conflicting state laws, citing Article 246(1) of the Indian Constitution.

The court also dismissed the argument that Section 26E of the SARFAESI Act required formal notification, asserting that the doctrine of harmonious construction should guide its interpretation.

This ruling brings relief to the financial institutions and banks by reaffirming their priority in recouping debts via property sales under the SARFAESI and RDB Acts and expediting debt recovery processes for these entities.

The court clarified the hierarchy of claims where secured creditors and revenue authorities proceed towards property sale proceeds.

The court reaffirmed the revenue’s right to sell properties for tax recovery, it emphasised that the sale proceeds must initially satisfy secured debts before addressing the revenue’s claims.

The judgment thus prioritised the interests of secured creditors and underscored the supremacy of the SARFAESI and RDB Acts over KGST and KVAT Act Claims.

The single bench of Justice Devan Ramachandran held that the Banks/Financial Institutions have priority over the Revenue’s claim in recovering their debts under the SARFAESI Act and RDB Act.

In result, the writ petitions are allowed and the respective orders or actions of the Revenue are quashed or set aside.

To Read the full text of the Order CLICK HERE

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