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Rights of secured creditors under SARFAESI, Recovery of Debts Act take precedence over statutory tax dues: Madras High Court
SUBJECT:
The Madras High Court has ruled that, in the event of a priority conflict, the entitlement of secured creditors under the Recovery of Debts and Bankruptcy Act and the SARFAESI Act to collect a debt must take precedence over statutory obligations under the Income Tax Act. The right to recover under the Income Tax Act of 1961 must give way to the provisions under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act even if recovery proceedings are quashed for any reason, according to a bench of Justices R Mahadevan and Mohammed Shafiq.
IMPORTANT PROVISIONS
- Section 26E of the SARFAESI Act: Priority to secured creditors
Regardless of any other laws currently in effect, obligations owed to any secured creditor following the registration of a security interest must be paid before all other debts as well as all revenues, taxes, cesses, and different rates owed to the Central Government, State Government, or local authority.
- Section 31B of the Recovery of Debts and Bankruptcy Act: Priority to secured creditors
Despite any other laws currently in effect, secured creditors' rights to collect secured debts due and payable to them through the sale of assets over which a security interest has been created shall take precedence over all other debts and government obligations, including revenues, taxes, cesses, and rates owed to the federal government, state government, or local authority.
OVERVIEW
- The courtbecamedeliberating over several writ appeals filed by way of financial institutions contesting a single choice ruling that the income tax branch's debts could take precedence over secured creditors' debts.
The unmarrieddecidehad said that even though the SARFESI Act and the
Debt recovery Act provide secured lenders the benefit, it's miles essential to remember that earnings tax is a component of a country's sovereignty and is required for accomplishing constitutional dreams and goals, so getting better tax debts ought to take priority.
ISSUES RAISED
The main issue here was whether income tax dues take precedence over the dues of secured creditors as mentioned under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act.
JUDGEMENT ANALYSIS
- The division bench concluded that it was apparent from the law and other Supreme Court rulings that "under common law, the priority of crown debts would prevail solely over unsecured creditors."
- The Court also made it clear that merely seizing property due to a tax default does not result in a charge.
- The Court ruled that such property attachment was intended to stop a tax defaulter's property from being sold, and it did not automatically give the government or creditors rights to the property.
CONCLUSION
The court docket resolved all the Writ Appeals after carefully analyzing the records and occasions of all the applicable Writ Petitions. There could be no order associated with the fee. As a result, all associated petitions had also been brushed off.
