Priority over secured creditors
Krishnan Venkatachalam
(Querist) 06 September 2009
This query is : Resolved
"X" an individual availed housing loan from a nationalised bank and the house property was Mortgaged to the bank till the repayment of loan."X" defaulted in payments and the bank issued notice to the borrower that it will auction the property. In the meanwhile "X" housing property along with some other properties were attached by the Income tax department. The bank which had given loan to "X" auctioned the property after giving due intimation to the IT department and issuing public notice for auction.
The question is whether Income tax department will have priority over the bank ( secured creditor ) in taking the sale proceeds of the auctioned property. The bankers claim that they have preference over the IT department quoting SARFESI Act. However some of my collegues say that the borrower is an individual and hence bank can not claim priority over IT department quoting SARFESI act which will be only applicable to borrowers who are company incorporated under companies Act.
Kindly clarify as to who will get priority over the sale proceeds of auction whether bank or IT Department.
Raj Kumar Makkad
(Expert) 06 September 2009
It is true that SARFESI act is applicable only if mortgagor of the bank is company hence Bank has no first lien over the dues of Income Tax Department and in the present circumstances definitely IT Department shall get priority over morgagee bank.riven
Manish Singh
(Expert) 07 September 2009
yes, the State shall have prority over the debts to be recovered from that property whether be it tax or otehrwise as held in a recent judgment by the Apex Court.
please go through teh following :
Monday, Mar 02, 2009 at 0000 hrs IST
Updated: Monday, Mar 02, 2009 at 0000 hrs IST
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New Delhi: In recovering debts or enforcing security interests, the state’s right to sales tax dues will have priority over claims of banks, financial institutions and secured creditors, the Supreme Court has ruled.
A bench comprising Justices B N Agarwal, G S Singhvi and Aftab Alam, while upholding the Bombay and Kerala High Courts’ judgments, said that tax dues to the state can claim priority over private debts.
The statutory first charge created in favour of the states under Section 38C of the Bombay Sales Tax Act, 1959, and Section 26B of the Kerala General Sales Tax Act, 1963, had primacy over the right of the banks to recover dues, it held.
The judges said while the primary objective of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, was to facilitate creating a special machinery like tribunals for a speedy recovery of the dues of banks and FIs, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, ensured that dues of secured creditors including banks and FIs were recovered from the defaulting borrowers.
However, it clarified that the judgment would not preclude the banks from realising their dues by taking recourse to other proceedings as permitted under law.
The judgment came on a batch of petitions filed by various banks challenging the High Court verdicts.
Stating that “priority given to the dues of banks etc cannot be diluted or stultified,” banks argued that Parliament had given priority to their right to recover dues or enforce security interest and the first charge created under state legislation must be treated subordinate to this right.
Opposing such rights, Maharashtra and Kerala submitted that levying and collecting tax, etc was a sovereign function as well as necessity of the State and as such the State had exclusive plenary powers to legislate on that subject.
The DRT Act or Securitisation Act, creating first charge in favour of the banks and FIs in lieu of their dues, cannot be given over-riding effect and the right of the state to recover sales tax cannot be frustrated merely because a bank, FI or secured creditor had initiated action for recovering debt, etc, they added.
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