State Debts to Take Precedence over Unsecured Third-Party Debts - International Law Office

International Law Office

Litigation - India

State Debts to Take Precedence over Unsecured Third-Party Debts

February 24 2009

Background
Decision
Comment


In Union of India v SICOM Ltd the Supreme Court of India had to decide whether realization of tax liability would have priority over secured debts due in terms of a statutory enactment.(1)

Background

The first respondent, SICOM Ltd, had been conferred with certain powers under the State Financial Corporations Act 1951. Exercising these rights, SICOM extended a loan of Rs5.1 million to the second respondent against a mortgage over certain assets. The mortgage was governed by the terms of the Financial Corporations Act. Following continued default on the part of the debtor to repay the loan amount to SICOM, SICOM initiated appropriate action under the terms of the Financial Corporations Act to proceed against the securities provided. The debtor company also owed the appellant substantial amounts of money in the form of central excise duty. In view of this default, the appellant expressed its intention to attach and seize the second respondent's properties. SICOM opposed the appellant's attempt through a series of correspondence, emphasizing SICOM's first charge over the properties that the appellant sought to seize. However, because the correspondence received no favourable response from the appellant, SICOM filed a writ petition before the High Court.

The issue before the court was whether SICOM's dues would have priority over the central excise dues. The High Court observed that SICOM's right as a secured creditor would take precedence over the amounts owed by the debtor to the appellant. The appellant appealed against the High Court order to the Supreme Court.

Decision

The Supreme Court dismissed the appellant's appeal with costs and rejected the appellant's primary contention that the tax dues, since they were state debts, would as a general principle take precedence over other debts due to third parties. While the Supreme Court acknowledged this principle of priority of state debts under common law, it clarified its scope as being applicable only against unsecured debts or claims.

Comment

Accordingly, cases of secured debts or debts in respect of which a first charge is created over property by way of a provision in statute would necessarily take precedence over state debts, if unsecured.

For further information on this topic please contact Manu Nair, Amit Jain, Saanjh Purohit or Arun Mohan at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500) or by fax (+ 91 11 2692 4900) or by email (manu.nair@amarchand.com or amit.jain@amarchand.com or saanjh.purohit@amarchand.com or arun.mohan@amarchand.com).

Endnotes

(1) 2009 (1) SCALE 10.


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