Secured creditor priority over State dues depends on Central Registry registration and cannot be bypassed by section 31B.

After the 2016 amendments, secured creditors are treated as having priority over State tax and other Government dues under the SARFAESI and RDB regimes, but only if the security interest is registered with the Central Registry and the statutory conditions are met. Section 26E operates prospectively from 24 January 2020, and mere mortgage registration under the Registration Act is insufficient. Section 31B cannot be used to bypass the mandatory registration requirements in section 26D or section 26E. In an as is where is auction sale, the purchaser does not automatically take the property free of statutory dues; the result depends on whether the State had lawfully perfected its charge before the Central regime applied.

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Issues: (i) whether a secured creditor has priority over State sales tax and other Government dues in the sale proceeds of a secured asset, (ii) whether section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and section 31B of the Recovery of Debts and Bankruptcy Act, 1993 operate prospectively and only upon CERSAI registration, (iii) whether section 31B can be used to bypass the requirements of section 26D and section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and (iv) whether an auction purchaser takes the property free of statutory tax dues when the sale is on an as is where is basis.

Issue (i): whether a secured creditor has priority over State sales tax and other Government dues in the sale proceeds of a secured asset.

Analysis: The statutory scheme of chapter IV-A of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and section 31B of the Recovery of Debts and Bankruptcy Act, 1993 was read against State provisions creating first charge for tax dues. The Court held that the expression "priority" was intentionally used to make the secured creditor's claim prevail over State dues, subject to registration and other statutory conditions. It also held that the State's first-charge provisions must yield where the Central statute applies, and that the older view in Central Bank of India does not survive the post-2016 amendments to that extent.

Conclusion: The secured creditor's claim has priority over State tax dues, subject to the statutory requirements under the Central enactments.

Issue (ii): whether section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and section 31B of the Recovery of Debts and Bankruptcy Act, 1993 operate prospectively and only upon CERSAI registration.

Analysis: The Court held that chapter IV-A introduced a new substantive regime, including a mandatory requirement of registration of security interest with the Central Registry. It further held that the provision granting priority under section 26E is prospective from 24 January 2020 and becomes available only after registration. Mere registration of a mortgage under the Registration Act was held insufficient to satisfy this requirement.

Conclusion: Section 26E operates prospectively and priority under it is available only after CERSAI registration.

Issue (iii): whether section 31B can be used to bypass the requirements of section 26D and section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Analysis: The Court construed section 31B in the context of the Recovery of Debts and Bankruptcy Act, 1993 and held that it applies where proceedings are instituted under that Act and the debt is adjudicated by the Debts Recovery Tribunal. It rejected the attempt to invoke section 31B as an alternative route when the secured creditor has not complied with the registration requirement under section 26D of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Conclusion: Section 31B cannot be used to circumvent section 26D or to obtain priority without compliance with the SARFAESI registration regime.

Issue (iv): whether an auction purchaser takes the property free of statutory tax dues when the sale is on an as is where is basis.

Analysis: The Court held that a sale on an as is where is, whatever there is basis places a duty on the purchaser to take the property with known encumbrances, while the authorised officer must disclose known encumbrances in the sale notice. The effect of statutory charge depends on whether the revenue had taken lawful attachment steps and proclamation before the Central regime became operative. Where the State had not lawfully perfected its claim by attachment and proclamation, the auction purchaser could not be burdened by the later tax claim; where such steps had been duly completed earlier, the revenue claim could survive.

Conclusion: An auction purchaser is not automatically free of statutory dues on an as is where is sale, but a later revenue claim cannot defeat a duly registered secured creditor's priority where the State has not lawfully perfected its charge in time.

Final Conclusion: The batch was disposed of by upholding the post-2016 priority regime in favour of secured creditors subject to CERSAI registration and the other statutory conditions, while applying that legal position differently on the facts of each writ petition, with some petitions allowed, some dismissed, and some remanded for further hearing.

Ratio Decidendi: After the commencement of chapter IV-A of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, a secured creditor obtains priority over Government dues only if the security interest is registered with the Central Registry, and section 31B of the Recovery of Debts and Bankruptcy Act, 1993 cannot be used to bypass that mandatory regime or to defeat a lawfully perfected prior statutory charge of the State.

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