Registered security interest under SARFAESI prevails over tax recovery demands once the secured debt is statutorily prioritised.

Sections 26C and 26E of the SARFAESI Act confer statutory priority on a registered security interest, requiring secured debts to be paid ahead of other debts, including taxes, cesses and other public dues. On the facts, the secured asset continued in the name of the borrower and guarantors, so the Court held that no issue of prospective or retrospective operation arose. Once the security interest was registered, the secured creditor's claim prevailed over the Commercial Taxes Department's recovery demand, and the tax demand was held illegal and unenforceable.

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Issues: Whether, after registration of security interest under the SARFAESI Act, the secured creditor's debt has priority over sales tax dues and allied tax recoveries claimed by the Commercial Taxes Department, and whether the impugned demand could be sustained.

Analysis: Sections 26C and 26E of the SARFAESI Act give statutory priority to a registered security interest and provide that secured debts are to be paid in priority over all other debts, including revenues, taxes, cesses and other public dues. The asset over which security interest had been created continued to stand in the name of the borrower and guarantors, and the Court held that the question of prospective or retrospective operation did not arise on those facts. Once the security interest had been registered, the secured creditor's claim prevailed over the tax department's demand.

Conclusion: The tax demand was held illegal and unenforceable, and the secured creditor was held entitled to priority over the State's recovery claim.

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