Secured Creditor’s Rights u/s 26E of SARFAESI Override State Sales Tax Claims: Bombay HC Clears Auction Sale in Canara Bank Case [Read Order]

In a recent ruling, the Bombay High Court held that secured creditors’ rights under Section 26E of the SARFAESI Act prevail over State sales tax claims, and that an auction purchaser acquires clear title free from such encumbrances.

Canara Bank had extended credit facilities to Pristine Switchgear Pvt. Ltd. and created a security interest over its immovable property, which was registered with CERSAI in 2011. The borrower defaulted and the account was classified as NPA.

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The Bank invoked the SARFAESI Act and sold the secured asset in a public auction in January 2023. A sale certificate was issued to the successful bidder and duly registered in February 2023.

Despite this, the Sales Tax Department continued to record encumbrances on the property in the revenue records, including a charge of Rs. 19.53 crore in August 2023. When the auction purchaser applied for mutation and construction permission, objections were raised on the basis of pending tax dues.

This led Canara Bank to approach the Bombay High Court.

The Bank’s counsel argued that the security interest created in 2011 and registered with CERSAI had priority over the State’s attachment made in 2015. They submitted that Section 26E of the SARFAESI Act gives overriding effect to secured creditors’ claims and once the secured asset is sold under the Act, the purchaser acquires clear and marketable title.

The counsel explained that the State could not recover its dues from the auctioned property and must instead pursue the borrower or its directors.

The Sales Tax Department’s counsel argued that Section 37 of the MVAT Act created a first charge in favour of the State, and the attachment of 2015 bound the property irrespective of the later auction.

They further argued that the auction was conducted on an “as is where is, whatever there is” basis, so the purchaser was obliged to bear the liability of outstanding sales tax dues. The counsel pointed out that the State’s charge was statutory and could not be displaced by the Bank.

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The Division Bench comprising Justice B. P. Colabawalla and Justice Somasekhar Sundaresan observed that the issue had been settled by the Full Bench in Jalgaon Janta Sahakari Bank Ltd., which clarified that once a security interest is registered with CERSAI, Section 26E gives it priority over State tax claims.

The court observed that Canara Bank’s charge was registered much before the State’s attachment and that the Sales Tax Department neither followed proper proclamation procedure nor registered its charge with CERSAI after 2020. The court explained that the “as is where is” clause cannot be used to burden the purchaser with undisclosed liabilities.

The court directed that the State’s encumbrance entries in the revenue records be deleted within two weeks, held that the auction purchaser had acquired clear title, and allowed the Bank’s writ petition. The State was left free to recover its dues from other assets of the borrower or its directors but not from the auctioned property.

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