Secured Creditors’ Priority Upheld: Gujarat High Court Rules Crown Debts Subordinate to SARFAESI Charge in Mutation Disputes

The Gujarat High Court upheld the priority of secured creditors under the SARFAESI Act, ruling that Crown debts are subordinate and cannot override the secured charge in matters related to property mutation.

The Single-Judge Bench of the Gujarat High Court, comprising Justice Nirzar S. Desai, while adjudicating a batch of petitions raising a common issue concerning the priority between a secured creditor’s charge under the SARFAESI Act and statutory dues recoverable by the State, held that the charge of a secured creditor under Section 26E of the SARFAESI Act enjoys statutory priority over Crown debts such as unpaid sales tax dues, which are unsecured in nature. Consequently, bona fide auction purchasers acquire a clear and marketable title unaffected by such government dues. The Court further held that mutation is a consequential right arising from a valid auction sale and cannot be denied merely due to the existence of pre-existing statutory charges.

In a significant judgment rendered on 09.10.2023, the Gujarat High Court addressed a batch of petitions that raised a common question concerning the legal priority between a secured creditor’s charge under the SARFAESI Act and statutory dues recoverable by the State, such as unpaid sales tax—a form of Crown debt. The petitioners, either successful auction purchasers or their successors, had acquired properties through auctions held by banks invoking powers under the SARFAESI Act after loan defaults. Their grievance was centred around the refusal of revenue authorities to record their names in land records due to unresolved tax charges and discrepancies in ownership documentation.

In the lead petition and similar connected matters, the purchasers had challenged the denial of mutation applications based on existing charges of the Sales Tax Department and inconsistencies in seller identity. The petitioners asserted that as bona fide purchasers through lawful auction processes, they were entitled to have their titles recognised, and the banks’ secured interest must take precedence over government dues. They relied extensively on Section 26E of the SARFAESI Act and a catena of decisions from the Supreme Court and various High Courts, including Dena Bank v. Bhikhabhai Prabhudas Parekh and Company, REEDLAW 2000 SC 04201 and Union of India v. Sicom Ltd., to contend that secured creditors have a statutory priority that overrides unsecured Crown debts.

The State, opposing the petitions, argued that the petitioners were not entitled to discretionary relief due to the significant delay in approaching the Court and that the auction terms were “as is where is,” leaving the burden on the purchasers to investigate encumbrances. It was contended that existing statutory charges, like the one dated 15.09.2006, could not be extinguished merely due to the auction sale and that the obligation to clear such dues rested with the banks conducting the auction. The State relied on decisions such as Medineutrina Pvt. Ltd. (Company) v. District Industries Centre (D.I.C.) and Others, REEDLAW 2021 Bom 02243 and Union of India v. N. Murugesan to emphasise delay and the doctrine of laches.

The High Court, after considering submissions from both sides, held that the rights of the banks as secured creditors under the SARFAESI Act had statutory primacy, and the petitioners, being bona fide purchasers, were entitled to a clear and marketable title. Referring to its prior rulings and Supreme Court judgments, the Court underscored that government dues, in the absence of a specific statutory first charge, could not override the rights of secured creditors. In doing so, it distinguished the judgment in Kotak Mahindra Bank Ltd. v. D.I.C., clarifying that it involved a dispute raised by a bank and not by a subsequent purchaser.

In affirming its view, the Court reiterated that under Section 26E of the SARFAESI Act and the overriding effect of Section 35, banks’ claims as secured creditors take precedence over unsecured Crown debts. It also noted that mutation is a ministerial function that follows valid title acquisition, and a delay in applying for it cannot negate substantive ownership rights. The objections raised by the State on the ground of pending tax dues and procedural discrepancies were found unsustainable in law.

Accordingly, the High Court allowed all the petitions and directed the revenue authorities to carry out mutation in the names of the petitioners and set aside any attachments or charges imposed by the State. The judgment serves to reaffirm the legal position that secured creditors’ rights under the SARFAESI Act prevail over Crown debts, providing certainty and protection to bona fide purchasers acquiring property through bank-led recovery proceedings. No order as to costs was passed.

Mr. Monal S Chaglani, Mr Pathik M Acharya, Mr Anmol A Mehta, Advocates, represented the petitioner.

Mr Jay Trivedi, AGP, appeared for the Respondent Nos. 1,2,3, and 5.

Mr. C.Z. Sankhla, Advocate, appeared for the Respondent No. 3.

Mr. Bhaskar Sharma, Advocate, appeared for the Respondent No. 4.

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