Safiya Malik

The High Court of Andhra Pradesh Division Bench of Chief Justice Dhiraj Singh Thakur and Justice Ravi Cheemalapati held that the rights of secured creditors shall have precedence over all other debts, including government dues such as taxes and cesses. The Court categorically allowed the writ petition filed by a secured creditor, holding that the bank's right to recover debts from secured assets would take precedence over the sales tax arrears sought to be recovered by the State under the A.P. Value Added Tax Act, 2005. The bench stated that the insertion of Section 31-B into the Recovery of Debts and Bankruptcy Act, 1993, with effect from 01.09.2016, provides statutory priority to secured creditors for realizing their debts. In light of the legislative mandate under Sections 31-B and 34 of the RDB Act, the Court allowed the petition.

The petitioner in the present writ petition was the Central Bank of India, which had advanced certain loans to M/s Sri Rajarajeswari Raw and Boiled Rice Mill, a partnership firm, wherein respondents Nos. 4 to 6 were the partners. To secure the loans disbursed in 2014, mortgage deeds and other security documents were executed in favour of the Bank. However, the borrowers defaulted on repayment obligations, following which the Bank initiated recovery proceedings before the Debts Recovery Tribunal, Hyderabad, under the Recovery of Debts and Bankruptcy Act, 1993.

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The Tribunal passed a decree in favour of the petitioner on 22.07.2022. A recovery certificate was issued on 06.09.2022 for an amount of Rs.79,74,57,988.09/-. Due to non-payment of the decretal amount, the Recovery Officer issued an attachment order dated 27.02.2023, attaching the mortgaged properties.

The petitioner obtained a valuation report of the mortgaged assets, estimating their value at approximately Rs.39.89 Crores with a distress sale value of Rs.29.89 Crores. However, the properties under mortgage were subject to another set of proceedings initiated under the A.P. Value Added Tax Act, 2005. By order dated 02.04.2024, the Commercial Tax Officer attempted to auction certain attached assets of the defaulting firm to recover tax dues.

The tax authority had levied a demand of Rs.15,02,102/- for the financial year 2015-16, through an order dated 31.12.2019. An additional demand of Rs.13,91,168/- was levied for the financial year 2016-17 by order dated 05.11.2020. Based on these assessments, the authorities moved to recover the tax dues by auctioning mortgaged assets.

The petitioner challenged the proposed action on the ground that their right as a secured creditor was protected under Section 31-B of the RDB Act. The petitioner further relied on Section 34 of the RDB Act, which provides that the Act shall have overriding effect over any other inconsistent law for the time being in force.

The State, represented by the Commercial Tax Department, argued that Section 26 of the A.P. VAT Act, 2005, conferred upon the State a statutory first charge over the property of VAT dealers or any other dealers for the recovery of taxes, penalties, or any sums payable under the Act.

Section 26 of the VAT Act reads: "Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, including deferred tax which is treated as a loan extended by the Government to the dealer, penalty, interest and any other sum payable by a VAT dealer or TOT dealer or any other dealer under the Act, shall be the first charge on the property of the VAT dealer or TOT dealer or any other dealer as the case may be."

The question for adjudication before the Court was whether the secured creditor's rights under Section 31-B of the RDB Act would prevail over the State’s claim of first charge under Section 26 of the VAT Act.

The Court framed the central issue as follows: "Whether, in the instant case, is it the Bank that has the priority over the secured asset, in terms of Section 31-B read with Section 34 of the RDB Act or the respondent No.2, who in terms of Section 26 of the Value Added Tax Act claims a first charge over the property of the unofficial respondent Nos.3 to 6."

The Bench noted that the petitioner placed reliance on the Supreme Court judgment in Central Bank of India vs. State of Kerala (2009) 4 SCC 94, where similar claims of tax recovery clashing with secured creditors’ rights were considered.

In that case, the Apex Court held: "There was no provision in either DRT Act or SARFAESI Act creating a first charge in favour of the banks, financial institutions or secured creditors for the properties of the borrower." Accordingly, the Court in that case cited in favour of the State tax authorities.

However, the Andhra Pradesh High Court distinguished the current scenario by noting that "at the time when the judgment was rendered by the Apex Court in the case of Central Bank of India (supra), Section 31-B was nowhere in existence, which was incorporated only by way of Act No.44 of 2016 with effect from 01.09.2016."

The Court quoted Section 31-B as follows:

"Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, 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."

Referring to Section 34 of the RDB Act, the Court recorded: "The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act."

The Court found that there is now a "specific provision providing for priority in favour of the secured creditors, to realize the secured debts, due and payable to them, over all other debts and Government dues."

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Accordingly, the Bench held that the Central Bank's claim must prevail over the tax recovery attempt.

The High Court issued the following clear directive: "Be that as it may, the present writ petition is allowed. No order as to costs. Pending miscellaneous applications, if any, in this petition, shall stand closed."

The Court stated that the right of the petitioner Bank to recover its dues by sale of the secured asset would have priority over the arrears which were sought to be recovered by the respondent State under the provisions of the A.P. Value Added Tax Act, 2005.

This categorical finding effectively negated the respondent's claim of statutory first charge under the VAT Act. The Bench concluded that the provisions of Sections 31-B and 34 of the RDB Act would override Section 26 of the VAT Act, given the former’s later legislative origin and specific language granting priority to secured creditors.

The Court did not grant any relief or direction beyond allowing the writ petition.

Advocates Representing the Parties:

For the Petitioners: Sri Mettu Srinivas Reddy, Advocate

For the Respondents: Government Pleader for Commercial Tax

Case Title: Central Bank of India v. The State of Andhra Pradesh and others

Neutral Citation: APHC010245862024

Case Number: Writ Petition No. 12247 of 2024

Bench: Chief Justice Dhiraj Singh Thakur and Justice Ravi Cheemalapati

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