SARFAESI | Secured Creditor's Prior Charge Over Property Takes Precedence Over State VAT Charge: Gujarat High Court

The Gujarat High Court has reiterated that a secured creditor's charge over a property will take precedence over a subsequent charge created by the State VAT Department. The court applied the principle to a property purchased by auction purchasers in proceedings under the SARFAESI Act.

The court relied on its earlier rulings, as well as the Supreme Court's judgment in Punjab National Bank v. Union of India.

A division bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati observed, “once any immovable property is mortgaged / hypothecated towards secured creditors then having regard to the provisions contained in Section 2(zc) to (zf) of the SARFAESI Act, 2002 read with the provisions contained in Section 31 of the SARFAESI Act, 2002, the secured creditor shall have the first charge on the secured assets.”

The court was dealing with a petition challenging the State VAT Department's charge over the property. The petitioners also challenged the January 24, 2022, order passed by the State Tax Officer creating the charge.

Raffles Green Pet India Private Limited had obtained credit facilities from the Bank of Baroda against which several properties were mortgaged. The property in question was owned by one of the company's guarantors, rather than the borrower itself.

After the company defaulted on the loan, Bank of Baroda auctioned the property under the SARFAESI Act. The petitioners emerged as successful bidders and were issued a sale certificate after making the required payment.

The sale certificate was subsequently registered before the Sub-Registrar at Kathlal. At the time of purchase, no encumbrance was recorded against the property in the revenue records or other statutory records.

The Mamlatdar, Kathlal, took possession of the property pursuant to an order of the District Magistrate and handed it over to the bank. The bank then handed over possession to the petitioners.

The court records the petitioners' allegation that the same Mamlatdar later mutated an entry in favour of the VAT Department. A public notice was also issued in the Financial Express.

The petitioners subsequently sold the property to Spartex Synthetics Private Limited through a registered sale deed. The revenue authorities did not give effect to the registered documents in the revenue records.

The issue came to light in January 2026 when Spartex sought to sell the property and checked its title. It found a charge in favour of the State VAT Department. Neither Spartex nor the petitioners had received notice before the charge was recorded, the judgment records. The petitioners sought its removal, but the charge remained.

They then approached the high court, arguing that it could not override the priority given to secured creditors under Section 26E of the SARFAESI Act. The court relied on earlier rulings in Kalupur Commercial Cooperative Bank Ltd. v. State of Gujarat, as well as the Supreme Court's judgment in Punjab National Bank v. Union of India.

Considering those rulings, the court observed that once an immovable property is mortgaged or hypothecated to a secured creditor, the secured creditor has the first charge over the secured assets. In the present case, the secured creditor's charge preceded the charge created by the VAT Department.

“The charge of the secured creditor shall precede over the charge of the VAT authority,” the court ruled.

The court allowed the petition and directed the authorities to remove the VAT Charge from the property records. The authorities were given 12 weeks from receipt of the order to comply.