Tax dues subservient to dues of secured creditors under SARFAESI Act and RDDB Act
Neha Sinha, Executive, Vinod Kothari & Company
corplaw@vinodkothari.com
Introduction
SARFAESI Act and RDDB Act are specific laws for recovery of debts. Both these laws provide that the secured creditors can claim priority for the realisation of dues. On the other hand, State and Central tax authorities can also enforce the payment of tax dues under tax statutes, which often create a statutory first charge in favour of the authorities. This may give rise to situations wherein the secured creditors are competing with the tax authorities in respect of payment of dues. Such competing claims have to be resolved in case of insolvency/deficiency.
A similar situation arose in the case of Jalgaon Janta Sahakari v. Joint Commissioner of Sales.[1] The Division Bench of the Bombay High Court decided on the issue of the conflict between SARFAESI Act and RDDB Act, and State tax statutes, in respect of priority of claims. The primary that arose in this case was whether State tax authorities can claim priority, by virtue of first charge created under State tax statutes, over a secured creditor for liquidation of their respective dues.
Chapter IV-A of the SARFAESI deals with registration of charges by secured creditors and. Pursuant to section 26D therein, a secured creditor who has not registered the charge loses his right to enforce the security under SARFAESI. Section 26E, which has a non-obstante clause, accords priority to the secured creditor who has registered the charge in the CERSAI, over “all other debts and all revenue, taxes, cesses and other rates payable to the Central Government or State Government or local authority.” Similarly, section 31B of the RDDB Act gives states that “notwithstanding anything contained in any other law….rights of secured creditors shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.” Pertinently, the aforesaid provisions in both Acts have a non-obstante clause, having the effect of overriding any other law inconsistent with it.
In the instant case, by virtue of relevant State tax statutes, a first charge was created in favour of State tax authorities. This brings forth the conflict as to who shall have priority in terms of payment- that State tax authorities with first charge or the secured creditors with the registration of charge in CERSAI?