Secured creditor priority over government dues upheld; revenue attachment and auction proceedings could not override the mortgaged property interest.

After registration of a security interest, a secured creditor's statutory priority under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act prevails over Government dues. The Andhra Pradesh HC rejected the revenue authorities' attachment and auction proceedings, holding that crown debt and objections based on the timing or assignment of the debt did not displace the secured creditor's priority. The impugned revenue notices were therefore unsustainable, and the writ petition succeeded in protecting the secured interest in the mortgaged property.

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Issues: (i) Whether the attachment and auction proceedings initiated by the revenue authorities could prevail over the petitioner's secured interest in the mortgaged property; and (ii) whether the claim of crown debt and the objection based on the timing of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act could defeat the petitioner's priority as a secured creditor.

Issue (i): Whether the attachment and auction proceedings initiated by the revenue authorities could prevail over the petitioner's secured interest in the mortgaged property.

Analysis: The petitioner was an asset reconstruction company and therefore a secured creditor. The property had been mortgaged long before the impugned revenue action, and the secured debt had been assigned to the petitioner. Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act both contain non obstante clauses and provide that secured creditors are to be paid in priority over other debts, including Government dues, after registration of the security interest. The Court held that these provisions leave no room for a contrary claim by the revenue authorities.

Conclusion: The revenue attachment and auction proceedings could not override the petitioner's secured interest, and this issue was decided in favour of the assessee.

Issue (ii): Whether the claim of crown debt and the objection based on the timing of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act could defeat the petitioner's priority as a secured creditor.

Analysis: The Court rejected the contention that crown debt would have precedence over the petitioner's mortgage. It also rejected the argument that the petitioner could not rely on the statutory priority provisions because the debt had been assigned or because those provisions were said to apply only prospectively. The Court found that the statutes do not create any such exception and that the secured creditor's priority operates against Government dues.

Conclusion: The claim of crown debt and the challenge based on prospective application were rejected, and this issue was decided in favour of the assessee.

Final Conclusion: The impugned attachment and auction notices were held unsustainable, and the writ petition succeeded by protecting the petitioner's priority as a secured creditor over the revenue claim.

Ratio Decidendi: After registration of a security interest, a secured creditor's statutory priority under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act prevails over Government dues, including revenue claims.

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