SARFAESI Priority Cannot Override State Tax Statutory First Charge, Rules Karnataka HC in BPL Engineering Winding-Up

The Karnataka High Court held that Section 26E of the SARFAESI Act, which confers priority on registered secured creditors, cannot extinguish a statutory first charge independently created under Andhra Pradesh tax legislation.

Justice Anant Ramanath Hegde of the High Court of Karnataka, sitting singly at Bengaluru, has dismissed an assets reconstruction company's bid to have two commercial tax attachment orders recalled, while simultaneously permitting the Commercial Tax Department of the Government of Telangana to sell a 42.99-acre industrial property in Sangareddy District for recovery of tax arrears exceeding Rs. 74 crore. The three consolidated company applications arose in the long-running winding-up proceedings of M/s BPL Engineering Limited. At the centre of the dispute was whether the priority in payment conferred by Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) upon a registered secured creditor could extinguish a statutory first charge independently created under Andhra Pradesh state tax legislation. The court answered firmly in the negative.

The Dispute Before the Court

M/s BPL Engineering Limited mortgaged its immovable property at Pashamylaram Village, Patancheru Mandal, Sangareddy District (formerly Medak District), Telangana, as security for loans taken from an IDBI Bank-led consortium. Two registered mortgage documents were executed on 1 December 1997 and 22 June 1998. The total land covered was 42.99 acres.

The loan account was classified as a Non-Performing Asset on 30 December 2001. IDBI assigned the debt to the Stressed Assets Stabilisation Fund (“SASF”) on 30 September 2004. BPL was eventually wound up by this court on 19 November 2012 in Company Petition No. 160 of 2005, with the Official Liquidator attached to the High Court of Karnataka taking charge.

The Commercial Tax Department (“CTD”), then functioning under the Government of Andhra Pradesh and now under the Government of Telangana, had issued two attachment orders against BPL's property: one on 25 October 2007 for Rs. 1.81 crore in tax arrears, and a second on 24 November 2011 for Rs. 72.21 crore in commercial tax arrears. SASF took physical possession of the mortgaged property on 18 April 2011 under Section 13(4) of the SARFAESI Act. The CTD's subsequent sale notice of 16 February 2012 was challenged by SASF before the Andhra Pradesh High Court, which granted an interim stay. After the winding-up order, that writ petition was disposed of as infructuous in September 2023, with liberty to SASF to approach the Official Liquidator.

On 31 August 2024, SASF assigned its recovery rights to Omkara Assets Reconstruction Private Limited (“Omkara Assets”), a securitisation and assets reconstruction company registered under Section 3 of the SARFAESI Act. Omkara Assets was substituted in place of SASF by an order dated 12 December 2024. By a prior order dated 12 September 2024, passed in Company Application Nos. 33, 34 and 240 of 2024, the court had permitted Omkara Assets to sell the property outside the liquidation proceedings. Critically, the CTD was not a party to those proceedings.

The security interest was belatedly registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (“CERSAI”) on 5 May 2021 by SASF under Chapter IVA of the SARFAESI Act.

Three Competing Applications

Three company applications were heard together. Company Application No. 49 of 2025 was filed by Omkara Assets seeking recall of the CTD's two attachment orders, relying primarily on Section 26E of the SARFAESI Act. Company Application No. 86 of 2025 was filed by the CTD seeking recall of the September 2024 order that had permitted Omkara Assets to sell the property outside winding-up proceedings. Company Application No. 89 of 2025 was also filed by the CTD, seeking the court's leave to sell the property itself for recovery of dues under the Andhra Pradesh General Sales Tax Act, 1957 (“APGST Act”), the Central Sales Tax Act, 1956 (“CST Act”), and the Andhra Pradesh Value Added Tax Act, 2005 (“APVAT Act”).

The applications were argued on three questions: whether Section 26E priority prevails over the statutory first charge under the AP tax enactments; whether a provision declared prospective can also have retroactive application; and whether the statutory first charge under the APGST Act and APVAT Act extends to dues recoverable under the CST Act, which itself does not expressly create a first charge.

Arguments on Section 26E and Priority of Secured Creditors

Senior Counsel K.G. Raghavan, appearing for Omkara Assets, submitted that Section 26E of the SARFAESI Act — introduced by the Amendment Act of 2016 and brought into force on 20 January 2020 — has retroactive application, and therefore governs all pending proceedings in which competing claims have not been finally adjudicated. He placed reliance on the Supreme Court's judgment in Vineeta Sharma v. Rakesh Sharma (2020) 9 SCC 1 for the proposition that a prospective amendment can also operate retroactively on pending transactions.

Senior Counsel also referred to Punjab National Bank v. Union of India (2022) 7 SCC 260 for the principle that a secured creditor has priority over unsecured Crown debts, and to a co-ordinate bench decision of the Karnataka High Court in Canara Bank v. State of Karnataka (W.P. No. 103730/2025 decided on 23 September 2025) where a SARFAESI charge was held to prevail over a GST Act claim. It was further argued that the security interest in favour of IDBI was created in 1997 and 1998, whereas both CTD attachment orders came later — in 2007 and 2011 — and thus the secured creditor's claim predated the attachments.

Counsel for the CTD, Manu Prabhakar Kulkarni, relied on the Supreme Court's ruling in Punjab and Sind Bank v. State of Punjab (2023) SCC OnLine SC 1894, which held that Section 26E operates prospectively, and on Jalgaon District Central Co-operative Bank Ltd. v. State of Maharashtra (2025) SCC OnLine SC 2513, where the Supreme Court held that Section 26E priority cannot override a statutory first charge independently created dehors a non obstante clause. The CTD further contended that its statutory first charge arose the moment the tax liability was incurred — as early as 1995 — long before the security interest in favour of the lending bank was created. The attachment orders in 2007 and 2011 were merely enforcement steps; they did not create the charge.

Court's Reasoning on the Core Question

Justice Hegde extracted the relevant paragraphs from the Supreme Court's decision in Jalgaon District Central Co-operative Bank Ltd. and identified two distinct principles. First, where two enactments contain conflicting non obstante clauses, the later enactment ordinarily prevails. Second, where a statutory first charge is created validly and independently of any non obstante clause, that charge prevails even against a later non obstante provision conferring mere priority in payment.

The court then examined Sections 16(4) and 16C of the APGST Act. Section 16(4) provides for recovery of tax dues as arrears of land revenue, which under the applicable land revenue legislation constitutes a first charge over the defaulter's property. Section 16C, inserted with effect from 6 April 1999, declares that tax dues “shall be the first charge on the property of dealer” notwithstanding anything in any other law. The court found that Section 16C does not independently create a first charge for the first time; rather, it declares that the first charge already recognised under Section 16(4) shall prevail notwithstanding other laws. The first charge thus exists dehors the non obstante clause.

Applying the Jalgaon District Central Co-operative Bank Ltd. principles, Justice Hegde held that Section 26E of the SARFAESI Act, which confers priority in payment rather than creating a statutory first charge of its own, cannot override a statutory first charge validly created under the state enactments independently of their non obstante clauses. The court expressly noted that the SARFAESI Act, prior to the 2016 amendment, did not confer any statutory priority upon secured creditors, as reiterated in Punjab and Sind Bank.

The court also addressed the September 2024 order that had permitted Omkara Assets to sell the property. Since the CTD was not a party to the proceedings in which that order was passed, and since the CTD holds a claim over the property, the order was recalled.

On Retroactivity of a Prospectively Declared Provision

On the second question — whether a provision declared prospective can also be retroactive — the court provided an extensive doctrinal discussion, though it held that the question did not ultimately survive in light of the Jalgaon District Central Co-operative Bank Ltd. ruling on priority versus first charge. The court engaged with it nonetheless given the frequency with which the issue arises.

Drawing on the Supreme Court's analysis in Securities and Exchange Board of India v. Rajkumar Nagpal (2023) 8 SCC 274 and Vineeta Sharma, the court distinguished between true retrospectivity (which destroys vested rights in respect of completed transactions), retroactivity or quasi-retroactivity (which applies a new rule to transactions still in progress or to situations whose character arose before the law's commencement), and prospectivity (which governs only future acts and events).

Justice Hegde held that declaring a provision “prospective” does not, by itself, foreclose all enquiry into retroactive application, unless the court making the declaration expressly or by necessary implication excluded retroactivity. Where retroactivity was neither raised nor decided, a subsequent court may still examine whether the provision admits of retroactive operation. However, the court added that where the Apex Court has expressly excluded both retrospective and retroactive application, no High Court may re-examine the question.

On Statutory First Charge Under the Central Sales Tax Act

On the third question, the court considered whether the CTD could assert a statutory first charge for dues recoverable under the CST Act, which, unlike the APGST Act and the APVAT Act, does not itself create a statutory first charge.

Section 9(2) of the CST Act authorises the state tax authorities to assess, collect and enforce payment of dues under the CST Act as if those dues were payable under the general sales tax law of the appropriate state, and to exercise all powers available under the corresponding state enactment. The court held that this language incorporates by reference the recovery machinery of the state enactments, including the statutory first charge created thereunder, unless expressly excluded by the CST Act. Since the CST Act contains no such exclusion, the statutory first charge available under the APGST Act and the APVAT Act applies equally for recovery of dues under the CST Act.

Observations on Legislative Drafting

Before setting out its conclusions, the court made observations on the recurring confusion generated by statutory amendments that do not expressly state whether they are prospective, retrospective, or retroactive, and how they apply to pending transactions. Chapter IVA of the SARFAESI Act was cited as an illustration of provisions that generated a “considerable debate” across courts.

The court expressed the view that it would be desirable for the legislature, when introducing amendments, to specify in clear terms how the provision is intended to apply to transactions that occurred before the amendment, to pending proceedings, and to future transactions. The court also commended the practice — found in several Indian codifications including the Indian Contract Act and the Transfer of Property Act — of incorporating illustrative examples within the text of provisions. These observations were explicitly framed as not constituting directions on legislative policy.

Order

The court passed the following directions:

Company Application No. 49 of 2025, filed by Omkara Assets Reconstruction Private Limited seeking recall of the CTD's attachment orders dated 25 October 2007 and 24 November 2011, was dismissed.

Company Application No. 86 of 2025, filed by the CTD seeking recall of the order dated 12 September 2024 in Company Application Nos. 33, 34 and 240 of 2024, was allowed. The September 2024 order permitting Omkara Assets to sell the property outside liquidation proceedings was recalled, as it was passed without hearing the CTD, which has a claim over the property.

Company Application No. 89 of 2025, filed by the CTD seeking leave to sell the BPL property, was allowed. The CTD is permitted to proceed with the sale of the property in accordance with law for recovery of dues under the APGST Act, the APVAT Act and the CST Act.

On completion of the sale, the entire amount realised is to be deposited in the account maintained by the Official Liquidator attached to the High Court of Karnataka, and thereafter placed in a fixed deposit with a nationalised bank for one year with an auto-renewal mandate, pending adjudication of the claims made by the Official Liquidator.

No order as to costs was made.