Bank’s Recovery Right Under RDB Act Overrides State’s Charge Under VAT Act; High Court Enforces Section 31-B
- REEDLAW
- Jun 19
- 3 min read
The Andhra Pradesh High Court, by invoking Section 31-B of the RDB Act, held that the Bank’s right of recovery takes precedence over the State’s charge under the VAT Act.
The Division Bench of the Andhra Pradesh High Court, comprising Chief Justice Dhiraj Singh Thakur and Justice Ravi Cheemalapati, while adjudicating a writ petition, held that Section 31-B of the RDB Act, inserted in 2016, explicitly grants priority to secured creditors over all other debts and government dues. As a result, this statutory provision overrides the first charge created under Section 26 of the A.P. Value Added Tax Act, 2005. Consequently, the Bank’s right to recover dues from the secured assets takes precedence over the State’s claim for VAT arrears.
The Central Bank of India had advanced loans to M/s Sri Rajarajeswari Raw and Boiled Rice Mill, a partnership firm comprising respondents 4 to 6, and secured the same through mortgage deeds executed in 2014. Upon the default in repayment by the borrower firm and its partners, the Bank initiated recovery proceedings before the Debts Recovery Tribunal, Hyderabad, under the Recovery of Debts and Bankruptcy Act, 1993. The Tribunal passed a decree in favour of the Bank on 22.07.2022 and issued a recovery certificate on 06.09.2022 for ₹79.74 crores. As the decretal amount remained unpaid, the Recovery Officer attached the mortgaged properties on 27.02.2023.
The Bank obtained valuation reports indicating a market value of approximately ₹39.89 crores and a distress value of ₹29.89 crores. While the recovery process was underway, the petitioner objected to an order dated 02.04.2024 passed under the A.P. VAT Act, 2005, by which some of the mortgaged and attached properties were sought to be sold by the State for recovering VAT dues amounting to ₹15,02,102 for the year 2015–16 and ₹13,91,168 for the year 2016–17. The Bank argued that, by virtue of Section 31-B and Section 34 of the RDB Act, it had priority over all other debts, including government dues. These provisions explicitly recognise the secured creditors’ right to recover dues by sale of secured assets with overriding effect over any other law.
In response, the State Government relied on Section 26 of the A.P. VAT Act, 2005, which states that tax dues shall constitute a first charge on the dealer’s property, overriding any contrary provisions. The Court noted that a similar issue was addressed by the Supreme Court in Central Bank of India v. State of Kerala and Others, REEDLAW 2009 SC 02201, where it was held that in the absence of a specific provision creating first charge in favour of banks, the priority of State dues under the respective sales tax laws would prevail. However, that ruling was based on the legal position as it stood prior to the insertion of Section 31-B in the RDB Act, which came into effect from 01.09.2016.
The High Court distinguished the present case from Central Bank of India v. State of Kerala and Others, REEDLAW 2009 SC 02201, by observing that Section 31-B, now a part of the RDB Act, unequivocally provides secured creditors with priority over all other debts and government dues. The respondent State did not dispute this legal position. Therefore, the Court held that the Bank’s right to recover its dues from the sale of secured assets takes precedence over the VAT arrears sought to be recovered under the A.P. VAT Act.
Consequently, the writ petition filed by the Central Bank of India was allowed, affirming the Bank’s priority under Section 31-B of the RDB Act. The Court made no order as to costs, and all pending miscellaneous applications were deemed closed.
Mr. Mettu Srinivas Reddy, Advocate, represented the Petitioner.
GP for Commercial Tax, appeared for the Respondents.
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