New Delhi, Jan 08: The Supreme Court has held that
secured creditors like the state financial corporations have
the first right to recover outstanding loan dues from a
defaulting entity.
A bench headed by Justice SB Sinha while dismissing the
Centre's petition said a secured debt like outstanding loans
will have priority over any other dues like excise and taxes,
which are unsecured debts.
The decision came on a petition filed by the Centre
against state financial corporation SICOM. The Centre
contended that the state had the first right to recover tax
dues, as without funds it would not be able to discharge its
functions efficiently.
This puts an end to a large number of cases where the
government, banks and other institutions are pitted against
each other in different courts fighting for their dues
during recovery proceedings from defaulters.
The bench said: "A debt which is secured or which by
reason of the provisions of a statute becomes the first charge
over the property, having regard to the plain meaning of
Article 372 of the Constitution, must be held to prevail over
the crown debt which is an unsecured one."
"The rights of the crown to recover the debt would prevail
the right of a subject. Crown debt means the debts due to the
state or the king; debts which a prerogative entitles the
crown to claim priority for before all other creditors. Such
creditors, however, must be held to mean unsecured creditors.
Principle of crown debt as such pertains to the common law
principle," it said.
According to the court, if a company had a subsisting
interest despite a lawful seizure, there cannot be any doubt
that a charge/mortgage over the immovable property would have
the same consequence.
The Centre had said the apex court had in various cases
recognised the principle of giving priority to the debts due
to the crown or state, as a sovereign should be able to
discharge its primary government functions efficiently for
which it should be in possession of necessary funds.
The revenue department had in 1988 initiated a recovery
proceeding against Mumbai-based Nihal Cast Nylon Private
demanding differential excise duty liability of around Rs 67
lakh, it had requested SICOM (respondent) not to dispose off
the plant and machinery of the assesses unless the latter paid
the government its dues.
The department had also impound the assesses' factory and
plant, which was closed due to financial dispute with
SICOM in December 1993, and the District Magistrate was asked
to recover the government dues.
However, SICOM had moved the Bombay High Court stating it
had the first right to recover its dues as the manufacturer
had mortgaged its entire present and future fixed assets and
had defaulted in making payments.
The High Court in August 2002 had asked the excise dept to
hand over the possession of the assets to SICOM which can
recover its dues by disposing off the same through public
auction under Section 29 of the State Financial Corp Act 1959.
The High Court while allowing SICOM's plea had held that
the mortgage deeds in favour of SICOM were prior to the claim
of the customs department and the latter can hardly claim
priority over the dues of the Corp.
Challenging the high court judgement the department said
"the High Court ought to have appreciated that the basis of
justification for the claim of the priority state debts is
rule of necessity and wisdom of conceding to the state the
right to claim priority in respect of its tax dues."
Bureau Report
First Published: Thursday, January 08, 2009, 00:00