This case, adjudicated by the High Court of Madhya Pradesh, revisited the critical question of whether secured creditors such as banks, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), have precedence over dues claimed by government departments like the Customs and Central Excise Department when both parties seek to recover dues from the borrower’s mortgaged property.
M/s Maya Spinners Ltd., is a 100% export-oriented unit engaged in manufacturing cotton, synthetic, and blended yarn. The company, along with other respondents, availed various credit facilities from institutions such as the Madhya Pradesh State Industrial Development Corporation (MPSIDC) and Dena Bank (which later merged with Bank of Baroda). To secure these loans, Maya Spinners Ltd. mortgaged its immovable properties, including its land, buildings, and machinery.
In the course of their business, Maya Spinners Ltd. imported machinery without paying customs duties, as they were classified as an export-oriented unit eligible for duty exemption. However, the company defaulted on customs duty payments amounting to ₹51,00,988 and excise duties of ₹10,14,099. Consequently, the Central Excise and Customs Department initiated proceedings against the company, confiscating machinery and seeking to recover the unpaid dues.
Simultaneously, the financial institutions involved, including MPSIDC and Bank of Baroda, moved to recover their outstanding loans by enforcing their security interests over the mortgaged property, initiating debt recovery proceedings under the SARFAESI Act through the Debt Recovery Tribunal (DRT).
The Customs Department argued that the machinery seized from Maya Spinners Ltd. was lawfully confiscated to recover unpaid customs and excise duties. They asserted that the government’s dues, particularly in relation to customs duties, had priority over all other claims, including those of secured creditors.
To support their position, the Customs Department cited the State Tax Officer v. Rainbow Papers Ltd. (2023) case, where the Supreme Court ruled that the definition of secured creditor in IBC does not exclude any Government or Government Authority on the ground that the financial creditors cannot secure their dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.
The banks and financial institutions argued that as secured creditors, they held a superior claim to the mortgaged property under the SARFAESI Act. They contended that their security interests over the property should take precedence over any dues owed to the government, as provided by Section 35 of the SARFAESI Act, which explicitly states that the Act’s provisions override any other laws.
The respondents further relied on the Punjab National Bank v. Union of India (2022) case, where the Supreme Court ruled that the claims of secured creditors under the SARFAESI Act took precedence over statutory dues, even after the inclusion of Section 11-E in the Central Excise Act.
The Madhya Pradesh High Court ruled in favor of the secured creditors, dismissing the petitions filed by the Customs and Central Excise Department. The court reaffirmed the precedence of secured creditors over government dues, citing the Punjab National Bank decision. The court emphasized that Section 35 of the SARFAESI Act grants secured creditors a first charge on the property, which supersedes any claims of statutory dues. The Court agreed with MPSIDC's reliance on Industrial Development Bank of India v. Superintendent of Central Excise and Customs and others, (2023) in which the Apex Court held that the Customs Act does not override payments due to overriding preferential creditors covered under Section 529-A of the Companies Act 1956. The court held that the customs authorities’ confiscation of the mortgaged machinery was invalid, as the property had already been hypothecated to the secured creditors.
The above ruling aligns with various similar judgments passed in other jurisdictions that have upheld the precedence of secured creditors' rights over the government’s statutory dues.
One of the significant cases reaffirming this principle is the Ronak Industries vs. Assistant Commissioner Central Excise & Customs & Ors. (2023), decided by the Bombay High Court wherein the court upheld that dues of secured creditors would take priority over government dues under Section 26E of the SARFAESI Act. This decision reinforced earlier rulings, such as ICICI Bank Ltd. vs. SIDCO Leathers Ltd., which clearly established that after registration of security interest, secured creditors enjoy precedence over the government’s claims.
Moreover, the Gujarat High Court’s ruling in the case of Madhaviben Jitendrabhai Rupareliya v. State of Gujarat, (Special Civil Application No. 9565 of 2023), further cemented this principle. Here, the court dealt with issues arising from the auction of properties previously owned by defaulters and held that the rights of secured creditors under Section 26E of the SARFAESI Act take precedence over any dues owed to the state, such as sales tax. This judgment was in line with other decisions of the Gujarat High Court, including M/s Mahadev Cotton Industries v. Department of Central Sales Tax and Vinod Realties Private Limited v. State of Gujarat.