Decision upholds government right to ‘first charge’

In Central Bank of India v State of Kerala and Ors on 27 February, the Supreme Court of India stated that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, (DRT Act) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002, (SARFAESI Act) do not create a preceding charge in favour of banks, financial institutions and other secured creditors. A specific statutory charge, meanwhile, prevails over the rights of any other secured creditor.

Under common law, a settled principle, also known as the doctrine of priority of state debts, allows the government to have a first charge over the priority of debts. However, there have been conflicts recently between secured creditors who have initiated credit recovery proceedings (under the provisions of the DRT Act or the SARFAESI Act) and the government, with respect to the priority of claims on the debts due to them.

In light of the doctrine of priority of state debts, the government has contended that it has priority over claims by secured creditors. Banks, financial institutions and other secured creditors that have initiated proceedings under the DRT Act or the SARFAESI Act have maintained that the non-obstante clause contained in both acts has an overriding effect on the provisions of any other legislation which provides for the recovery of dues, including debts due to the state.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.