Prospective secured-creditor priority cannot displace a State tax first charge where the later provision is inapplicable.

Section 26E of SARFAESI was treated as prospective and did not govern a State recovery action that had begun in 2014, so the bank could not claim priority under that later provision. Section 35 of the Punjab VAT Act created an express first charge on the defaulter's property for tax dues, and because Section 26E was inapplicable, there was no overriding inconsistency to displace that statutory priority. The State's first charge therefore remained superior to the bank's security interest, and the bank's challenge failed.

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Issues: (i) Whether Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 applied to a State recovery action that had commenced before its introduction; (ii) whether the State's first charge for tax dues under Section 35 of the Punjab Value Added Tax Act, 2005 prevailed over the bank's claim based on the security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Issue (i): Whether Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 applied to a State recovery action that had commenced before its introduction.

Analysis: The recovery proceedings by the State had commenced in 2014, whereas Section 26E was inserted with effect from 24.01.2020. The provision was treated as prospective in operation and therefore could not govern the earlier State action.

Conclusion: Section 26E did not apply to the dispute and the bank could not derive priority from it.

Issue (ii): Whether the State's first charge for tax dues under Section 35 of the Punjab Value Added Tax Act, 2005 prevailed over the bank's claim based on the security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Analysis: Section 35 of the Punjab Value Added Tax Act, 2005 expressly created a first charge on the property of the defaulter for tax dues. In the absence of Section 26E operating in the case, there was no inconsistency between the two enactments that would displace the State's statutory priority. The State's claim, being a statutorily recognised first charge, prevailed over the bank's security interest.

Conclusion: The State's first charge under Section 35 of the Punjab Value Added Tax Act, 2005 had priority over the bank's claim.

Final Conclusion: The bank's challenge failed because the later secured-creditor priority provision was inapplicable, and the State's statutory first charge on tax dues remained superior.

Ratio Decidendi: A later provision granting priority to secured creditors operates prospectively, and where a State statute already creates a first charge on tax dues, that statutory first charge prevails in the absence of an applicable overriding provision to the contrary.

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