Government Dues Subordinate to SARFAESI Recoveries

Brief Overview:

Recoveries effected through enforcement under SARFAESI has first priority over the sales tax authorities.

Technical Details:

A Writ Petition was filed challenging the attachment made by the sales tax authorities over an apartment in Mumbai that had been purchased by the auction purchaser from an asset reconstruction company (“ARC”). The ARC had stepped into the shoes of a bank which had registered its charge on the apartment with the Central Registry of Securitisation and Security Interest of India (“CERSAI”). The ARC exercised its enforcement rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). The sales tax authorities asserted their statutory charge.

The Bombay High Court held that :

1) Pursuant to Section 26-C(2) of the SARFAESI Act, the enforcement of a security interest registered with CERSAI prior in time would have priority over any subsequent security interest registered over the same asset; and

2) Under Section 26-E of the SARFAESI Act, once a secured creditor registers its security interest, the debts owed to such secured creditor shall be paid from the proceeds of enforcement over that asset, in priority over all other debts, including taxes payable to the (State) Government.

JC takeaway:

The auction proceeds of the sale of secured asset under SARFAESI would first go towards discharging the dues owed to Lender Bank/ARC. The residue, if any, after discharging the dues of Lender Bank/ARC, may flow to the tax authorities.

For further details, please see:  

Purushottam Chavan v. DCST & Ors., Bombay HC

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