Secured Creditors Shall Prevail Over Government Dues: Allahabad High Court Quashes Attachment of Mortgaged Property by State Authorities

“Even a Government Debt Cannot Override a Secured Charge Created Under SARFAESI” – Allahabad High Court emphatically ruled that secured creditors enjoy absolute statutory priority over all other dues including State and Central Government taxes or revenues, by virtue of Section 26E of the SARFAESI Act, 2002 and Section 31B of the RDB Act, 1993. The Court set aside the attachment order dated February 9, 2015 passed by the Sub-Divisional Magistrate, Jaunpur, declaring it to be illegal and without jurisdiction.

The Division Bench of Justice Shekhar B. Saraf and Justice Praveen Kumar Giri held that “a secured creditor shall always have precedence over an unsecured creditor, including the Government,” and observed that non-obstante clauses in SARFAESI and RDB Acts are meant to override all contrary State enactments or administrative actions.

“Even Crown Debt Must Yield to Secured Charge Under SARFAESI” – Court Declares that Attachment of Mortgaged Property for State Dues is Illegal

The case originated when the Bank of Baroda, through its Regional Stressed Asset Recovery Branch, sanctioned a cash credit facility of ₹30 lakhs on November 10, 2011 in favour of M/s L.G. Corporation, a proprietorship owned by Geeta Devi, who mortgaged more than 20,000 sq ft of land as security. After default, the account was declared a Non-Performing Asset in 2015, and proceedings under Section 13 of the SARFAESI Act were initiated.

However, the bank’s enforcement action was obstructed when the Sub-Divisional Magistrate attached the same property via order dated February 9, 2015, in furtherance of a recovery certificate issued by the Department of Food and Civil Supplies, U.P., Jaunpur, for outstanding dues of over ₹54 lakhs. The bank challenged this attachment in the present writ, arguing that State recovery actions cannot supersede the secured interest protected by SARFAESI.

“Priority to Secured Creditors is Not a Mere Procedural Device – It is a Statutory Right” – Court Delivers Categorical Interpretation of Section 26E and 31B

The petitioner bank contended that once a valid mortgage had been created in 2009 and enforced under SARFAESI, the State’s attachment of the mortgaged property was an illegal encroachment on a secured creditor’s rights. The bank invoked Section 26E of the SARFAESI Act, which provides:

“Notwithstanding anything contained in any other law... the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government...”

The Court agreed and noted that both Section 26E and Section 31B contain non-obstante clauses, placing them above any conflicting provision in other statutes. The Court emphasized:

“It is crystal clear that the priority conferred under Section 26E of the SARFAESI Act... would prevail over an unsecured creditor, even though the unsecured creditor is the Government.”

“When Two Laws Have Competing Non-Obstante Clauses, The Later Law Must Prevail” – Court Applies Principle of Statutory Hierarchy

The respondents argued that their recovery certificate predated the SARFAESI proceedings and that the mortgage had not been notified to the Revenue Authorities. The Court flatly rejected this line of reasoning, reiterating that the date of the Government's recovery action is irrelevant when the secured creditor has already created a valid charge under SARFAESI.

The High Court heavily relied on Supreme Court precedents, especially the decision in Kotak Mahindra Bank Ltd. v. Girnar Corrugators Pvt. Ltd. where it was held:

“If two enactments have competing non obstante clauses and nothing repugnant, then the non obstante clause of the subsequent statute would prevail.”

The Court reasoned that SARFAESI (with its 2016 amendment inserting Section 26E) is a later and more specific statute than the State’s recovery mechanisms, and hence overrides them.

“District Magistrate Has No Jurisdiction to Obstruct Secured Creditor’s Recovery” – Court Rebukes Administrative Interference

The Court took serious note of the Sub-Divisional Magistrate’s role in obstructing the bank’s efforts to enforce its security interest. Citing Kotak Mahindra Bank Ltd. again, it said:

“The Naib Tehsildar or District Magistrate is duty-bound under Section 14 of the SARFAESI Act to assist the secured creditor. They have no jurisdiction to adjudicate rights or refuse possession due to unrelated recovery certificates.”

It held that once symbolic possession had been taken under Section 13(4) and physical possession was ordered under Section 14, no executive authority could deny enforcement by citing Government dues.

Secured Creditors’ Statutory Priority Must Be Protected, Even Against the State

In a resounding conclusion, the Court declared: “It is patently transparent that even the debt which is due to the Government comes subsequent to the recovery of dues of a secured creditor. The said enactment is intended not only to facilitate loan recovery procedures... but also to impede the conversion of resources into Non-Performing Assets.”

The writ petition was allowed and the impugned attachment order dated February 9, 2015 was quashed. The Court held that the bank is entitled to continue SARFAESI enforcement unimpeded, with full statutory backing.

Date of Decision: October 14, 2025