A well-settled principle under common law, the ‘Doctrine of Priority of State debts’ holds that the government (‘State’) has first charge over the priority of debts. However, recent past has witnessed conflicts between the ‘State’ on the one hand and secured creditors who initiated credit recovery proceedings under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“DRT Act”) or SARFAESI Act. Litigations of this nature where Banks and financial institutions seek priority in debt-recovery makes things pretty difficult for the Supreme Court, in its appellate capacity. The situation is fairly similar to an unruly crowd struggling to move ahead in a Queue!
Recently in the matter of Central Bank of
Though, the SC has recognized the fact that the two enactments were meant to benefit banks, financial institutions and other secured creditors, it has been clarified that these two Central legislations do not per se create first charge in favour of the banks, financial institutions and other secured creditors. Thus, it can be concluded that the State would have priority of claim if there is a specific provision giving priority to the State dues.
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