Secured creditor gets priority over Sales Tax Department for recovering dues from mortgaged assets under SARFAESI Act Section 26E

The Bombay HC ruled that a secured creditor has priority over the Sales Tax Department for recovering dues from secured assets. The Sales Tax Department relied on a September 2013 communication to Talathi preventing sale transactions, while the secured creditor held an equitable mortgage from March 2007. Following the Full Bench precedent in Jalgaon Janta Sahakari Bank Ltd., the court held that without a valid attachment order and proclamation under the Code and Rules of 1967 prior to Section 26E of SARFAESI Act coming into force, the Sales Tax Department cannot claim priority. Mere communication to Talathi was insufficient to establish precedence over secured creditor's rights.

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Issues:
Priority of secured creditor vs. Sales Tax Department in recovering dues from borrower's assets.

Analysis:
The petitioner, a creditor, provided financial assistance to a borrower who later defaulted, leading to the borrower's account being declared as a Non-Performing Asset (NPA). Subsequently, the Sales Tax Department issued a communication in 2013 to prevent the sale of secured assets for recovering its dues. The petitioner filed a writ petition seeking to lift the attachment imposed by the Sales Tax Department on the properties.

The petitioner argued that it had the first charge over the secured assets and was entitled to sell them for recovering its dues. Referring to a judgment, the petitioner contended that unless the Sales Tax Department followed the prescribed procedure for attaching the assets, it had no right to prevent the sale. The petitioner had conducted an auction of the properties with the Official Liquidator's approval, depositing the sale proceeds in court, and sought permission to withdraw the amount.

On the other hand, the Sales Tax Department claimed priority in recovering dues, citing notices issued under the Maharashtra Value Added Tax Act and steps taken for recovery. It argued that its actions predated the statutory provisions that gave priority to secured creditors and thus should be allowed to sell the assets first.

The court analyzed the legal provisions and held that without a valid order of attachment and proclamation as per the rules, the Sales Tax Department could not claim priority over the secured creditor. The mere communication to prevent the sale was insufficient, and the Sales Tax Department failed to establish its precedence over the creditor. The court allowed the petitioner to withdraw the sale proceeds, confirming the petitioner's priority over the Sales Tax Department in recovering dues from the secured assets.

In conclusion, the court ruled in favor of the petitioner, granting priority to the secured creditor over the Sales Tax Department regarding the secured assets. The court allowed the petitioner to withdraw the sale proceeds and permitted further pursuit of related prayers. The writ petition was disposed of accordingly, with costs not awarded to either party.

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