State Tax First Charge Prevails Over SARFAESI Section 26E Priority: Karnataka HC

Conclusion: Registration of security interest with CERSAI under Sections 26C and 26E of the SARFAESI Act did not override a statutory first charge created under the APGST Act, APVAT Act, or applicable for recovery of CST dues. Section 26E conferred only priority of payment and operateds prospectively, without displacing statutory first charges already recognized by law. Accordingly, the secured creditor’s application seeking priority and recall of attachment orders was dismissed, the Commercial Tax Department’s application was allowed, and the Department was permitted to proceed with the sale of the secured property, subject to deposit of the sale proceeds before the Official Liquidator pending adjudication of competing claims.

Held: The dispute concerned the priority of claims between a secured creditor, Omkara Assets Reconstruction Pvt. Ltd., which asserted priority under Sections 26C and 26E of the SARFAESI Act based on registration of its security interest with CERSAI, and the Commercial Tax Department, which claimed a statutory first charge over the borrower’s assets under the Andhra Pradesh General Sales Tax Act (APGST), Andhra Pradesh Value Added Tax Act (APVAT), and the Central Sales Tax Act (CST). The secured creditor sought recall of attachment orders and priority in realization of sale proceeds, whereas the Commercial Tax Department asserted that its statutory first charge prevailed notwithstanding the SARFAESI registration. The Court also examined whether Section 26E of the SARFAESI Act operated prospectively, retrospectively, or retroactively and whether the statutory first charge available under State enactments extended to CST dues. The secured creditor contended that registration of security interest with CERSAI under Chapter IVA of the SARFAESI Act conferred statutory priority over all other claims, including Government dues, by virtue of Section 26E. It further argued that even if Section 26E was prospective, it possessed retroactive operation enabling it to prevail over pre-existing statutory claims where recovery proceedings had not crystallized. The Commercial Tax Department contended that statutory first charges created under the APGST and APVAT Acts existed independently of the non obstante clause in Section 26E and therefore remained unaffected by subsequent CERSAI registration. It further argued that the Supreme Court in Jalgaon District Central Co-operative Bank Ltd. had conclusively held that Section 26E did not override statutory first charges and operated prospectively. It was also submitted that recovery of CST dues attracted the same statutory first charge because Section 9(2) of the CST Act incorporated the recovery machinery and powers available under the State enactments. It was held that section 26E of the SARFAESI Act merely accords priority of payment to registered secured creditors and does not extinguish or override a statutory first charge created independently under State tax enactments. Reading Sections 26C and 26E harmoniously, the Court observed that the priority conferred under Chapter IVA applies only against subsequent security interests, transfers, and attachment orders, and cannot defeat a statutory first charge already created by law. Relying on the Supreme Court’s decision in Jalgaon District Central Co-operative Bank Ltd., the Court held that Section 26E is prospective and cannot override statutory first charges created dehors the non obstante clause.  Since the Apex Court had authoritatively settled the scope of Section 26E, the High Court could not extend its operation beyond the declared legal position. The Court also held that although the CST Act did not expressly create a statutory first charge, Section 9(2) incorporated the recovery mechanism and enforcement powers available under the State sales tax enactments. Consequently, the statutory first charge available under the APGST and APVAT Acts equally governed recovery of dues arising under the CST Act.