Gujarat High Court: Secured Creditor Claims Precede Sales Tax Charges on Auctioned Properties

Gujarat High Court: Secured Creditor Claims Precede Sales Tax Charges on Auctioned Properties

In a recent ruling, the Gujarat High Court confirmed that secured creditors enjoy a preferential right to repayment compared to unsecured creditors.

The above ruling stemmed from a legal challenge (writ petition) questioning the priority of claims on a property: Should the secured creditor be paid first, or should the government's claim for unpaid sales tax take precedence?

This case involved a series of petitions stemming from disputes over the priority of claims on properties due to unpaid sales tax and challenges faced by auction purchasers seeking to update ownership records.

The lead petition challenged the dismissal of property transfer applications subsequent to an auction, the context involving a convoluted history of land transactions, auctions, and legal complexities. Further petitions, raising analogous issues, sought personalized resolutions through a consolidated court proceeding.

The principal inquiry in this case revolved around the priority of claims on the property: would the secured creditor or the State/Central Government (Crown debt) hold the first charge due to outstanding dues from the Sales Tax department?

The matter was adjudicated by a single-judge bench, with Justice Nirzar S Desai presiding.

The Court acknowledged that each property underwent auctioning initiated by the Debt Recovery Tribunal for recovering debts owed to the respective banks, as mandated by DRT orders in preceding proceedings.

"Being the Secured Creditor, the Banks were enjoying priority in terms of Section 26 E of the SARFAESI Act," the Court observed.

The Court grounded its decision in precedent, including Vinod Realities Private Limited v. State of Gujarat (2011) and Punjab National Bank v. Union of India (2022), which established the primacy of secured creditor claims over those of unsecured creditors (including the Crown).

The Court declined to accept AGP Trivedi's contention, concluding that the State and its authorities lacked sufficient justification for denying the petitioners' application to record their ownership of the property in question.

The Court further rejected the argument relating to the delay, emphasizing the petitioners' bona fide acquisition of the property. Having purchased it through auction or from the successful bidder, they have invested a substantial amount and acquired legal title through the issuance of sale certificates. As of today, they hold legal ownership of the property in question.

“Reflection of their names in the revenue record by way of mutation entry is merely a consequential action based upon their title over the property in question. When their title is unquestionable, as the respective Banks have issued Sales Certificate in favour of petitioners, the petitions cannot be thrown away on the ground of alleged delay,” the Court added.

In a resounding victory for the petitioners, the Court directed the respondent authorities to update the revenue records in their favour, nullifying any attachments or charges levied by the State or its authorities on the properties in question. This decision was based on the recognition of the first charge held by the respondent Bank in each of the petitions.