Court rules in favor of statutory first charge under state tax laws against priority payment under SARFAESI Act, affecting Omkara Assets Reconstruction's claims.
In a significant judgment, the Karnataka High Court has resolved the legal tussle between Omkara Assets Reconstruction Private Limited and the Commercial Tax Department (CTD) concerning the statutory first charge and priority payment under the SARFAESI Act, 2002. The court ruled in favor of the CTD, asserting that the statutory first charge created under the Andhra Pradesh General Sales Tax Act, 1957, Andhra Pradesh Value Added Tax Act, 2005, and the Central Sales Tax Act, 1956, takes precedence over the priority in payment conferred under Section 26E of the SARFAESI Act.
The case revolved around the competing claims over the assets of M/s BPL Engineering Limited, which had mortgaged its property to secure loans from an IDBI Bank-led consortium. While Omkara Assets argued for priority based on the SARFAESI Act, the CTD maintained its statutory first charge due to tax arrears. The court's decision underscores the primacy of statutory charges under state tax laws, which operate independently of the non obstante clause in the SARFAESI Act.
The court further clarified that Section 26E of the SARFAESI Act does not create a statutory first charge but merely confers priority in payment. Moreover, the court noted that the law declared as "prospective" by the Supreme Court does not preclude high courts from examining its retroactive application unless explicitly ruled out.
In related applications, the court dismissed Omkara Assets' plea to recall the CTD's attachment orders and allowed the CTD to proceed with the sale of BPL's property to recover the tax dues. The proceeds from the sale are to be deposited with the Official Liquidator, ensuring compliance with legal protocols.
This judgment is expected to have wide-ranging implications for financial institutions and tax authorities, reaffirming the strength of statutory charges in debt recovery processes.
Bottom line:-
The statutory first charge created under the Andhra Pradesh General Sales Tax Act, 1957, Andhra Pradesh Value Added Tax Act, 2005, and the Central Sales Tax Act, 1956, prevails over the priority of payment conferred under Section 26E of the SARFAESI Act, 2002, as Section 26E does not create a statutory first charge but merely confers priority in payment. Further, a law declared as "prospective" by the Supreme Court does not preclude a High Court from examining its retroactive application unless explicitly ruled out.
Statutory provision(s): Andhra Pradesh General Sales Tax Act, 1957, Andhra Pradesh Value Added Tax Act, 2005, Central Sales Tax Act, 1956, SARFAESI Act, 2002, Section 26E
