Realisation of Debt

Monday, Mar 02, 2009 at 0000 hrs IST

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.