Secured creditor priority prevails over sales tax arrears unless the statute expressly creates a first charge.

Sales tax arrears under section 24 of the Tamil Nadu General Sales Tax Act, 1959 do not automatically override a secured creditor's rights under the SARFAESI Act. The stated principle is that governmental dues may have priority over unsecured debts, but they do not displace a valid secured debt unless the statute expressly creates a first charge that prevails over secured interests. Where the bank has a valid security interest and enforces it by SARFAESI measures, the State's recovery claim cannot defeat the secured asset already sold by the bank.

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Issues: Whether the State's claim for sales tax arrears under section 24 of the Tamil Nadu General Sales Tax Act, 1959 could override the rights of a secured creditor who had enforced security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Analysis: The secured creditor had created a valid security interest over the property and had proceeded under the SARFAESI Act by issuing notice and selling the secured asset. The State relied on section 24 of the Tamil Nadu General Sales Tax Act, 1959 and on the doctrine of statutory first charge, contending that arrears of tax had priority over all other claims. The Court applied the earlier Division Bench view and the principles noticed from the Supreme Court that governmental dues may have priority over unsecured debts, but such priority does not displace a secured debt unless the statute expressly creates a first charge that can prevail over secured interests. The statutory scheme of the SARFAESI Act recognised the bank as a secured creditor with a secured interest in the asset, and the State's claim was treated as one that could not defeat that secured interest.

Conclusion: The State could not assert priority over the secured creditor's interest in the mortgaged property, and section 24 of the Tamil Nadu General Sales Tax Act, 1959 did not prevail against the bank's secured debt in the facts of the case.

Final Conclusion: The writ appeal succeeded, and the impugned judgment and recovery proceedings were set aside to the extent they affected the secured asset already sold by the bank.

Ratio Decidendi: A State's claim to sales tax arrears will prevail over unsecured debts, but it cannot displace the rights of a secured creditor enforcing a valid security interest unless the statute clearly gives the State a first charge that overrides secured debt.

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