Court directs removal of VAT Department's charge on auctioned property, affirming secured creditor's primacy under Section 26E of SARFAESI Act, 2002
In a significant ruling delivered on September 7, 2026, the Gujarat High Court (Division Bench) has clarified the primacy of secured creditors over government dues such as VAT claims under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The Court directed the removal of a charge created by the State Value Added Tax (VAT) Department on a property auctioned by Bank of Baroda under SARFAESI proceedings, holding that such a charge is subordinate to the rights of secured creditors.
The dispute arose when Anand Chandubhai Thakkar and others, the petitioners, purchased immovable property situated at village Pithai, Taluka Kathlal, District Kheda, through an e-auction conducted by Bank of Baroda. The property was mortgaged to the bank by a company that defaulted on its loan repayment. After acquiring the property and obtaining a registered sale certificate, the petitioners sold it to Spartex Synthetics Private Limited. However, subsequent to the sale, the VAT Department created a charge on the property through Entry No.12724 in the revenue records, alleging dues relating to the period before the sale.
The petitioners challenged the VAT Department's charge, contending that under Section 26E of the SARFAESI Act (notified effective September 1, 2016), secured creditors enjoy priority over all other debts, including government dues such as VAT. They argued that the VAT Department's charge, created post-auction, was invalid and should be removed from the records. They further pointed out that they had not received any notice from the VAT authorities regarding such charge, and that the mutation of the charge entry was illegal.
The respondents, including the State Tax Officer and VAT Department, did not dispute the legal position regarding Section 26E but maintained their claim over the property dues. The Court heard submissions from all parties and relied heavily on the Supreme Court's authoritative decision in Punjab National Bank v. Union of India (2022), which had settled that secured creditors have overriding priority under the SARFAESI Act over government dues.
The Gujarat High Court reiterated that once a property is mortgaged or hypothecated to secure a loan, the secured creditor obtains the first charge on the asset. Subsequent charges, including those created by state authorities such as the VAT Department, cannot override the secured creditor's rights. The Court noted that the auction purchasers acquire a clean and marketable title free from such encumbrances.
Accordingly, the Court quashed the VAT Department's charge entry and directed the revenue authorities to remove Entry No.12724 from the property records within twelve weeks of the order. The Court emphasized that the secured creditor's charge created under the SARFAESI Act supersedes any charges created after the auction and that the VAT Department's claim could not interfere with the rights of bona fide auction purchasers.
This judgment reinforces the legal framework protecting secured creditors and clarifies the hierarchy of claims in property disputes involving government dues. It provides assurance to banks and financial institutions that their security interests will be respected over subsequent government claims, facilitating smoother recovery of dues and promoting confidence in auction sales under SARFAESI proceedings.
Bottom Line:
Secured creditors have priority over government dues, including VAT claims, under the provisions of the SARFAESI Act, 2002, as per Section 26E. Charges created under state laws are subordinate to the priority of secured creditors.
Statutory provision(s):
SARFAESI Act, 2002 Section 26E, Sections 2(zc) to 2(zf), 31, 37; Gujarat Value Added Tax Act, 2003; Gujarat Land Revenue Code, 1879 Section 135D
