In recovering debts or enforcing security interests, the State’s right to sales tax dues, etc 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.

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