Secured creditor priority in liquidation prevails over sales tax dues when Section 529A and SARFAESI operate together.

Where a borrower company is in liquidation, Section 529A of the Companies Act gives overriding preferential treatment to workmen's dues and secured creditors ranking pari passu with them, so a secured creditor enforcing security under SARFAESI may realise the secured asset outside the winding up and take priority over the State's sales tax claim under the MVAT Act. The general position that SARFAESI does not itself create a first charge, and that State first-charge provisions ordinarily prevail, was distinguished on the facts of liquidation. The later insertion of Section 26-E of SARFAESI was noted as statutory recognition of secured creditor priority, and the recovery notices were held unsustainable.

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Issues: Whether a secured creditor enforcing security under the SARFAESI Act has priority over the State's claim for sales tax dues under the MVAT Act when the borrower company is under liquidation and the secured assets have been sold.

Analysis: The decisive factor was the company's liquidation status and the operation of Section 529A of the Companies Act, 1956, which gives overriding preferential payment to workmen's dues and debts due to secured creditors ranking pari passu with them. The Court distinguished the general rule that the SARFAESI Act does not by itself create a first charge in favour of banks and financial institutions, and recognised the line of authority holding that State first-charge provisions under sales tax enactments ordinarily prevail in ordinary cases. It held, however, that where the borrower is in liquidation, the secured creditor may stand outside the winding up and realise its security, and the priority recognised by Section 529A prevails over the State's statutory charge. The later insertion of Section 26-E of the SARFAESI Act was also noticed as statutory recognition of secured creditor priority.

Conclusion: The secured creditor's claim had priority over the State's tax dues, and the impugned recovery notices could not stand.

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