Punjab National Bank vs. State Of Hp

Held

The Court held that in view of the provisions of Section 26E of the SARFAESI Act, 2002, and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, a secured creditor has priority over the rights claimed by the Revenue. The Court reasoned that these central statutes, as amended, explicitly grant priority to secured creditors. It noted that various High Courts, including Gujarat, Madhya Pradesh, and Bombay, have taken a similar view, holding that central statutes creating priority for secured creditors rank above state tax charges. The Court found that the provisions of Section 26 of the HP VAT Act, 2005, must yield to the provisions of Section 26E of the SARFAESI Act and Section 31B of the RDB Act. Consequently, the Court quashed the notice dated June 24, 2017 (Annexure P-10) and declared that the respondent-Department cannot claim a first charge over the secured assets of the petitioners belonging to the private respondent-company, as the petitioners have the first charge.

Facts

The petitioners, Punjab National Bank and another, filed a writ petition challenging the actions of the State of Himachal Pradesh and its departments in attaching property mortgaged to the bank by respondent No. 4, M/s Rupana Paper Mills Private Limited. The bank had advanced significant financial facilities to respondent No. 4, secured by an equitable mortgage of its factory land and building, and had also registered its charge with various authorities. Respondent No. 4 defaulted on loan repayments, leading the bank to initiate recovery proceedings under the SARFAESI Act and file a suit before the Debt Recovery Tribunal. The bank attempted to auction the mortgaged property, but prospective bidders informed them of a prior charge claimed by the State, leading to the bank's inability to auction the assets. The State's claim of a first charge was communicated via a notice dated June 24, 2017.

Key Issues

1. Whether the charge claimed by the State Government for tax dues under the Himachal Pradesh Value Added Tax Act, 2005, has priority over the first charge created in favour of the financial institution (petitioners) under the SARFAESI Act, 2002, and the RDDBFI Act, 1993? Petitioner's Arguments: The petitioners contended that as secured creditors, their mortgage rights and first charge over the secured assets prevail over the tax liability of the defaulting borrower. They relied on the provisions of the SARFAESI Act and the RDDBFI Act, as amended, which grant priority to secured creditors. They argued that the State's claim of a first charge was in contravention of these central statutes. Revenue's Arguments: The Senior Additional Advocate General for the respondents was unable to draw the court's attention to any judgment post-amendments to the SARFAESI Act and RDDBFI Act that would grant the revenue priority over a secured creditor.