Allahabad High Court Upholds Priority of Secured Creditors Over Government Dues
The court quashes attachment order in favor of Bank of Baroda, emphasizing the precedence of secured debts over unsecured government claims.
In a significant ruling, the Allahabad High Court has reaffirmed the priority of secured creditors over unsecured creditors, including government debts, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act). The Division Bench comprising Justices Shekhar B. Saraf and Praveen Kumar Giri quashed the attachment order issued by the Sub-Divisional Magistrate, Sadar, Jaunpur, which aimed to recover government dues from a property mortgaged to the Bank of Baroda.
The case arose when the Regional Stressed Asset Recovery Branch of Bank of Baroda filed a writ petition challenging the attachment of assets mortgaged by M/s L.G. Corporation, a firm owned by Smt. Geeta Devi. The bank had sanctioned a cash credit facility of Rs. 30 lakhs, secured by mortgaging land. However, upon default, the bank initiated recovery proceedings under the SARFAESI Act.
Despite the bank's secured interest, the state authorities issued an attachment order for recovering dues from the mortgagor, leading the bank to seek judicial intervention. The court, referencing Section 26E of the SARFAESI Act and Section 31B of the RDB Act, emphasized that secured creditors have precedence over all other debts, including government dues.
The judgment reiterated that the non-obstante clause in these sections ensures secured creditors' priority, aligning with previous Supreme Court judgments such as SICOM Limited and Kotak Mahindra Bank Limited. The court highlighted that when two statutes contain competing non-obstante clauses, the later enactment prevails, further strengthening the bank's position.
This ruling underscores the courts' commitment to protecting financial institutions' rights, ensuring that secured debts are prioritized over unsecured claims, even those from the government. Legal experts view this as a reaffirmation of the legal framework supporting financial asset securitization and recovery in India.
Bottom Line:
Secured creditors have priority over unsecured creditors, including debts due to the government, under Section 26E of the SARFAESI Act and Section 31B of the RDB Act.
Statutory provision(s): Section 26E of the SARFAESI Act, Section 31B of the RDB Act, Article 226 of the Constitution of India
