Banks get priority over govt in recovery of dues: Gujarat High Court

Source: dnaindia.com

The Gujarat High Court has ruled that secured creditors like banks would have priority over the government to sell secured assets of loan defaulters for the recovery of their dues.

The ruling came from the single-judge bench of Justice JB Pardiwala who was adjudicating a dispute between Bank of Baroda and Gujarat government over who would have priority to recover its dues from Water Force Pumps. 

Notably, the company had defaulted on both loan repayment to the bank and value-added tax (VAT) payable to the government. The borrower’s of the loan — Navin Patel and Pallavi Patel — are absconding and have left the country.

As per the case details, the borrowers had availed a loan of Rs. 4.85 crore in phases from the bank and mortgaged some properties, including their bungalow, for the same. They defaulted on payment in 2016 after which the bank, following the due procedures of law, took over possession of the properties in August 2017 and issued an auction notice. 

The commercial tax department of the state government also issued property attachment orders in July 2017 and subsequently, an auction notice on August 20, 2018, for recovery of tax dues from the firm. 

This led to a clash between the bank and the government over who would conduct the auction of properties and get the proceeds from it, with the bank eventually approaching the high court.

Counsel for the bank contended that as per the amendment in Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2016, the debt due to the bank would have to be cleared on priority as against the taxes payable to the government. It was argued that the provisions in SARFAESI Act supersede the provisions of the Gujarat Value Added Tax (GVAT) Act.

The bank’s counsel also contended that the account of the borrowers was declared non-performing asset (NPA) in May 2016 and the symbolic possession of the secured assets was taken over by the bank in September 2016. 

On the contrary, the liability of the company under the GVAT Act was determined and became due in March 2017, when the bank had already taken over the possession of the properties.

The counsel for the state government contended that the amendment in SARFAESI Act cannot be implemented retrospectively and the same cannot nullify the powers of the state government to recover tax dues from a defaulter. 

It was also argued that the dues of the company have accrued from 2012 onwards and the state should get precedence in the recovery by auctioning of properties as per the GVAT Act.

The court, however, ruled in favour of the bank clarifying that bank would be free to auction the properties and use the proceeds to recover the debt of borrowers. It also remarked that the government cannot claim precedence on the strength of GVAT Act as against the provisions of SARFAESI Act.