Secured Creditors Now Take First Seat: Andhra Pradesh High Court Rules Bank Has Priority Over VAT Dues Under Section 31B of RDB Act

“With the 2016 amendment, there is no ambiguity—secured creditors rank above government dues including taxes and cesses”, In a significant decision reaffirming the statutory primacy of secured creditors in debt recovery proceedings, the Andhra Pradesh High Court held that tax recovery actions by State authorities under the A.P. VAT Act, 2005 cannot override the priority rights of secured creditors, once such rights are recognized under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act).

The Division Bench of Chief Justice Dhiraj Singh Thakur and Justice Ravi Cheemalapati ruled unequivocally:

“There is a specific provision providing for priority in favour of secured creditors to realize the secured debts… we have no hesitation to hold that the Bank’s right would have priority over the arrears sought to be recovered by the State under the A.P. VAT Act.”

Bank Loan Secured by Mortgage Over Properties—Later Attached by Commercial Tax Department

The petitioner, Central Bank of India, had granted loans to M/s Sri Rajarajeswari Raw and Boiled Rice Mill and its partners in 2014. Following default, the Bank obtained a recovery certificate for ₹79.74 crore from the Debts Recovery Tribunal (DRT), Hyderabad, on 6 September 2022.

When the Bank initiated recovery proceedings and attached the mortgaged properties, it discovered that the Commercial Tax Officer had separately initiated proceedings to recover VAT dues of ₹15.02 lakh for 2015–16 and ₹13.91 lakh for 2016–17, and had begun the process of selling the same secured assets through an order dated 2 April 2024.

State Relied on VAT Act’s First Charge Clause—Court Said RDB Act Now Overrides It

The State argued that Section 26 of the A.P. VAT Act, 2005 gave it a “first charge” on a dealer’s property for tax dues. However, the Court contrasted this with Section 31B of the RDB Act, inserted in 2016, which gives statutory priority to secured creditors:

“Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors… shall have priority over all other debts and Government dues including revenues, taxes, cesses and rates.”

The Court also invoked Section 34 of the RDB Act, which grants the Act an overriding effect over other laws unless specifically excluded.

“The provisions of the RDB Act shall have effect notwithstanding anything inconsistent therewith contained in any other law… including laws claiming first charge.”

Landmark Supreme Court Precedent Acknowledged, but Distinguished After 2016 Amendment

The State referred to the Supreme Court’s ruling in Central Bank of India v. State of Kerala (2009) 4 SCC 94, where it was held that sales tax laws creating a first charge were not overridden by the DRT Act or SARFAESI Act, as these Acts did not then create a corresponding statutory charge in favour of banks.

But the High Court pointed out that the 2009 ruling predated the introduction of Section 31B:

“It is not out of place here to mention that at the time when the judgment was rendered… Section 31-B was nowhere in existence… which was incorporated only by Act No.44 of 2016.”

“The legal position now stands altered… There is no doubt that Section 31B places the rights of secured creditors above all other dues, including taxes.”

Bank's Priority Upheld, Tax Recovery Proceedings Quashed

Allowing the writ petition, the Court held that the Bank’s right to sell the secured asset must prevail over the VAT Department’s attempts to sell the same property to recover tax dues:

“The writ petition is allowed. No order as to costs. Pending miscellaneous applications, if any, shall stand closed.”

This judgment marks a clear enforcement of the 2016 legislative intent behind Section 31B of the RDB Act—to elevate secured creditors above tax departments in the waterfall of recovery priorities. It also clarifies the current legal position in the post-Central Bank of India (2009) era, ensuring that secured financial institutions are not thwarted by State revenue claims once recovery processes are underway.

“After the 2016 amendment, there is no ambiguity. Tax departments cannot defeat a bank’s claim over a mortgaged asset merely by invoking first charge under VAT law.”

Date of Decson: 21 May 2025