Blog Details

Priority to the Secured Creditor Under the SARFAESI Act

Section 26E of the SARFAESI Act holds significant importance in defining the rights of secured creditors, particularly when it comes to the priority of their claims. This provision ensures that, notwithstanding any other law, once a security interest is registered, the debts owed to any secured creditor are paid in priority over all other debts, including revenues, taxes, cesses, and other rates payable to the Central Government, State Government, or Local Authorities.

Secured Creditor's Priority Over Other Debts

In simpler terms, after the registration of a security interest under the SARFAESI Act, the claim of the secured creditor—such as a bank or financial institution—takes precedence over other claims, including government dues and taxes. This provision solidifies the secured creditor's position in case of default or liquidation, ensuring they are paid first from the proceeds of the secured asset.

Secured Creditors' Priority in Matrimonial Disputes

The priority of secured creditors is further reinforced in cases involving matrimonial disputes. For instance, in the matter of Tripti Manish Sahni v. Manish Govindram Sahni (Writ Petition No. 3682 of 2012), the Bombay High Court dealt with a case where the wife challenged SARFAESI proceedings initiated by the bank against her husband’s mortgaged property. She sought to secure her right to maintenance and her residence, along with the support for her two minor children.

The Court ruled in favor of the bank, stating that the bank, as a secured creditor, has a prior charge over the mortgaged property. The Court noted that the order for maintenance was issued after the bank had created its charge on the property. The bank, therefore, had the right to proceed with the sale of the property under the SARFAESI Act. However, the Court also directed that after recovering its dues, the bank should deposit 50% of the remaining amount in the Court for the petitioner’s benefit.

This case underscores that secured creditors, such as banks and financial institutions, have a prior claim over mortgaged property—even in the face of matrimonial disputes.

Legal Precedents on Secured Creditor's Rights

1.Civil Court’s Limitations: Civil courts cannot grant an injunction to prevent a bank from taking measures under the SARFAESI Act, as such actions are barred under Section 34 of the Act. This was affirmed in the case of Punjab National Bank v. Shekh Jumman Shaikh Guljar (2010(2) DRTC Bombay 499).

2.Labour Court's Jurisdiction: Similarly, labour courts have no authority to prohibit secured creditors from exercising their powers under the SARFAESI Act. The case Union Bank of India v. General Workers Union (2009 (1) GLR 867, Gujarat) highlighted that under Section 35 of the SARFAESI Act, the labour court lacks the jurisdiction to interfere with the secured creditor’s rights.

Conclusion

In conclusion, Section 26E of the SARFAESI Act ensures that secured creditors have a superior right over other creditors, including in cases involving matrimonial disputes or labour-related issues. Courts consistently uphold the priority of secured creditors, reinforcing their ability to enforce their rights to recover dues without interference from civil or labor courts. This legal framework ensures a clear path for secured creditors to recover their dues in a timely and orderly manner.

BY: MR. SADASHIV PIMPLASKAR (LEGAL HEAD)