Secured creditor priority under SARFAESI overrides later state tax charge over mortgaged property

Once a security interest is registered under the SARFAESI Act, the secured creditor's claim takes priority over governmental tax dues, and section 35 gives the SARFAESI regime overriding effect over inconsistent state law claims of first charge. The Gujarat HC analysis states that, where the mortgaged property was taken into possession and sold through the statutory auction process, the State's later VAT charge under section 48 could not defeat the bank's prior secured interest. The secured creditor was therefore entitled to priority, removal of the revenue charge, and reflection of the sale certificate in the revenue record.

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Issues: Whether the secured creditor's right under the SARFAESI Act, after creation and registration of security interest, prevails over the State's claim of first charge under section 48 of the Gujarat Value Added Tax Act in respect of the same mortgaged property.

Analysis: The property was mortgaged to the bank, possession was taken under the SARFAESI framework, and the secured asset was sold by public auction in accordance with the statutory sale procedure. Section 26-E of the SARFAESI Act gives priority to secured creditors over all other debts, including revenues, taxes, cesses and other dues, after registration of the security interest. Section 35 further gives the SARFAESI Act overriding effect over other laws. In contrast, the State's charge arose later in point of time and could not defeat the prior secured interest, especially in light of the settled principle that a secured creditor's claim prevails over unsecured governmental dues where the statute creating the State claim does not override the SARFAESI regime.

Conclusion: The secured creditor's claim had priority over the State VAT charge, and the State could not assert first charge over the subject property.

Final Conclusion: The writ petition was allowed and the bank was entitled to have the revenue charge removed and the sale certificate reflected in the revenue record.

Ratio Decidendi: Once security interest is registered, section 26-E of the SARFAESI Act accords priority to the secured creditor's debt over governmental tax dues, and by virtue of section 35 the SARFAESI regime overrides inconsistent state law claims of first charge.

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