Secured loans will have priority over excise dues: SC

NEW DELHI: 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 S B 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.