Supreme Court of India · 25 April 2000
Dena Bank v. Bhikhabhai Prabhudas Parekh & Co
(2000) 5 SCC 694 · AIR 2000 SC 3654 · Priority of Crown Debts and the Secured Creditor
Court
Supreme Court of India
Bench
R.C. Lahoti J (author), S.R. Babu J
Decided
25 April 2000
Citation
(2000) 5 SCC 694 · AIR 2000 SC 3654
Background & Facts
On 12 April 1972 Dena Bank filed a suit against a partnership firm, M/s Bhikhabhai Prabhudas Parekh & Co, and its partners for recovery of Rs.19,27,142.29 with future interest, enforcing a mortgage by deposit of title deeds made by the firm and its partners on 24 April 1969. While the suit was pending, the State of Karnataka tried to attach and sell the mortgaged properties for arrears of sales tax due from the firm under the State and Central sales-tax Acts; as recorded by the trial court, the State itself purchased the property at an auction held on 30 April 1976.
The trial court found the mortgage proved and held that the State could not have attached and sold the partners' properties for the firm's sales-tax dues, but dismissed the suit because the Bank's officer was not proved to have been authorised to sign and verify the plaint. In appeal, the High Court held the officer authorised; the Bank and the borrowers compromised on 27 January 1992; and, the State not being a party to the compromise, the High Court decreed the suit (judgment of 3 August 1992) subject to the condition that the sales-tax arrears due to the State would have preference over the Bank's claim. The Bank appealed against that preference. The State did not appear in the Supreme Court.
Questions Before the Court
Holdings of the Court
Holding 1 — The Common-Law Priority Is Confined to Unsecured Creditors
Following the Constitution Bench in Builders Supply Corporation v. Union of India (AIR 1965 SC 1061), the Court accepted that the common-law doctrine of priority of Crown debts is law in force under Article 372(1) and gives arrears of tax priority over private debts. But “the Crown’s preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors”: the doctrine “would not extend to providing preference to crown debts over secured private debts”. Where the right of the subject is complete and perfect before that of the King commences, the rule does not apply.
Holding 2 — A Statute Can Give the State Precedence Even Over a Mortgage
Karnataka sales tax is recoverable as an arrear of land revenue (Section 13(3)(a) of the Karnataka Sales Tax Act, 1957, read with Section 190 of the Karnataka Land Revenue Act, 1964), and Section 158(1) of the Land Revenue Act gives the State's claim to moneys recoverable under that Chapter precedence “over any other debt, demand or claim whatsoever whether in respect of mortgage, judgment-decree, execution or attachment, or otherwise howsoever”. The Court held that Section 158 not only gives statutory recognition to the State's priority but extends it over private debts secured by mortgage. It distinguished Collector of Aurangabad v. Central Bank of India, where the local Acts had no provision in pari materia.
Holding 3 — Partners' Property and Section 15(2-A)
Where a taxing statute treats a firm as a separate assessable entity, its partners are not liable for the firm's tax without a specific statutory provision (Commissioner of Sales Tax v. Radhakrishan). Section 15(2-A) of the Karnataka Sales Tax Act, inserted by Amending Act 23 of 1983, is such a provision: it makes the firm and each partner jointly and severally liable. The Court held the sub-section prospective, not retrospective, and applicable to the dues still outstanding.
Result — Appeal Dismissed
The Court accepted that when the State first attached and sold the partners' mortgaged property it could not have appropriated the proceeds to the firm's tax arrears and defeated the Bank's security. But it refused relief: the Bank's decree was yet to be executed, setting the sale aside would only revive the arrears, and with Section 15(2-A) now applying, “The State shall have a preferential right to recover its dues over the rights of the appellant Bank and the property of the partners shall also be liable to be proceeded against.” The appeal was dismissed without costs.
Practical Implications for Creditors
Dena Bank is cited for the general rule that the State's common-law priority for its dues is confined to ordinary or unsecured creditors and does not rank Crown debts ahead of secured private debts. It is equally authority for the limit of that rule: a statute can extend the State's precedence over a mortgage, and in this case Section 158 of the Karnataka Land Revenue Act did so, so that the secured Bank lost. The practical check, wherever a bank's security competes with Government dues, is whether the statute under which those dues are recoverable contains a precedence provision of that kind.
The statutory position has since changed. Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (inserted by Act 44 of 2016, with effect from 1 September 2016) provides that, notwithstanding anything in any other law, the rights of secured creditors to realise secured debts by sale of the assets over which security interest is created shall have priority over all other debts and Government dues, including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. Section 26E of the SARFAESI Act (inserted by the same Act, with effect from 24 January 2020) gives the same priority after the registration of the security interest. Under the Explanation to each, where insolvency or bankruptcy proceedings are pending in respect of the secured assets, the priority is subject to the Insolvency and Bankruptcy Code, 2016.
Relevant Statutory Provisions
Practical Application Note
Where a bank's security over an asset competes with a tax or other Government claim over the same asset, Dena Bank v. Bhikhabhai Parekh holds that the State's common-law preference is confined to unsecured creditors — but also that a statute giving the State's dues precedence over a mortgage displaces that rule, as it did on the facts of this case. This note is general legal information, not legal advice. Our partner-led team — Senior Partner Advocate Subodh Bajpai (LLM, MBA XLRI) and our advocates — advises banks, NBFCs and ARCs on priority disputes with revenue authorities and on enforcement under SARFAESI and the RDB Act.
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