How to Establish and Defend a Secured Creditor's Priority Over Government Dues Under the SARFAESI Act
A secured creditor's priority over government dues is statutory, but it is not automatic. Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 confers priority only after the security interest has been registered, and a revenue department that has attached property can still defeat a lender that cannot produce the right record. The Bombay High Court's judgment of September 11, 2026 in Indian Overseas Bank v. State of Maharashtra and Others, which quashed a State auction conducted without the prescribed proclamation, illustrates how these contests are actually decided. This guide sets out the steps for establishing the priority and for defending it against a competing revenue claim.
Step 1: Register the Security Interest With the Central Registry
Registration is the gateway. Section 26D provides that no secured creditor is entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the Central Registry. Section 26E then confers priority
after the registration of security interest. The two provisions work together: without registration there is neither an enforcement right under Chapter III nor a statutory priority to assert.
In practice, the exposure sits in legacy security. Charges created before the Central Registry became operational, or before a portfolio was acquired, are the ones most likely to be unregistered. Reconcile sanctioned security against Central Registry records at portfolio level rather than file by file once a dispute arises.
Step 2: Fix the Relevant Dates Before Arguing the Merits
Priority contests turn on commencement dates as much as on text. Two dates govern:
September 1, 2016: Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 came into force by notification S.O. 2831(E). It gives the rights of secured creditors to realise secured debts priority over all other debts and Government dues including revenues, taxes, cesses and rates.
January 24, 2020: Section 26E of the SARFAESI Act came into force by notification S.O. 4619(E) dated December 26, 2019, although it was enacted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.
Build a chronology that places the creation of the security interest, its registration, the borrower's default, the State's attachment order, the proclamation if any, and the sale against those two dates. In a contest over a pre-2020 attachment the analysis follows the framework set out by a larger bench of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax Nodal 9, Mumbai, decided on August 30, 2022, which held that a department claiming a statutory first charge must show a formally ordered attachment and a proclamation under the applicable State law.
Step 3: Demand the Proclamation Record, Not Just the Attachment Order
This is the step most often skipped, and it decided the Indian Overseas Bank case. Revenue statutes distinguish between attaching property and proclaiming its sale. In Maharashtra, Section 192 of the Maharashtra Land Revenue Code, 1966 read with Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967 requires a proclamation in a prescribed manner, including beating of drums, affixation on the property and display on the notice board. Other States have equivalent provisions.
Seek inspection of the department's file and press for four things: the attachment order with its date and the officer who passed it; the proclamation with its date and contents; proof of the manner in which it was effected, by panchnama, service report or notice board record rather than an assertion in an affidavit; and the sale record showing bids received and whether the authority itself purchased the property. Where the department shows an attachment but no compliant proclamation, the dues do not acquire priority over those of the secured creditor.
Step 4: Check Whether the Department Filed Its Attachment With the Central Registry
Section 26B(4) places a filing duty on the revenue side. Every authority or officer of the Central Government, a State Government or a local authority entrusted with recovery of tax or other Government dues, and with issuing attachment orders, is required to file the attachment order with the Central Registry together with particulars of the assessee and details of the dues, in the prescribed form and manner and from the date notified by the Central Government.
A Central Registry search should therefore be run in both directions. It establishes the lender's own registration, and it shows whether the competing attachment appears at all. In the Indian Overseas Bank case the State's affidavit did not demonstrate any Central Registry filing, which sat alongside the absent proclamation as a feature of an incomplete process.
Step 5: Choose the Right Forum
The remedy depends on what is being challenged.
Measures under Section 13(4): An application under Section 17 of the SARFAESI Act lies to the Debts Recovery Tribunal, open to any person including the borrower, within forty-five days.
A State sale, auction or mutation entry: Where the challenge is to the legality of a revenue sale and to entries in the record of rights, the writ jurisdiction of the High Court has been the effective route, as it was in the Indian Overseas Bank case.
Relief to seek: Frame the prayer to cover the sale, the consequential transfer and the mutation entry together. Setting aside the sale alone leaves the record of rights showing the Government as occupant.
Step 6: Preserve the Position of the Auction Purchaser
Where the secured creditor has already sold the asset, the buyer's title is part of what is being defended. Assemble the enforcement chain in order: the demand notice under Section 13(2), the possession notice under Section 13(4), the auction, and the sale certificate. A documented chain is what allows a Court to treat the secured creditor's process as the valid one when it is set against a defective revenue sale. Advise purchasers accordingly at the diligence stage: a record of rights disclosing a mutation entry in favour of a Government, or a sale at a nominal price with no independent bidder, calls for the proclamation record to be examined before the transaction proceeds.
Step 7: Expect the Government Dues to Survive
Succeeding on priority is not the same as extinguishing the State's claim. In the Indian Overseas Bank case the Court preserved the State's right to recover from the borrower's other assets and from any residual sale proceeds. Where realisation exceeds the secured debt and enforcement costs, the surplus is exposed to the revenue claim, so the accounting should be prepared on that basis.
Note also the Explanation to Section 26E. Where insolvency or bankruptcy proceedings are pending in respect of the secured assets, the priority of secured creditors is subject to the Insolvency and Bankruptcy Code, 2016. Section 31B carries an Explanation in the same terms. A priority argument built on Section 26E alone will not survive the commencement of a corporate insolvency resolution process.
Common Pitfalls to Avoid
Treating registration as a formality: An unregistered charge is not a weaker claim to priority. It is outside Section 26E altogether, and Section 26D withholds the Chapter III enforcement rights as well.
Arguing priority without a chronology: A submission that ignores when the competing attachment was made invites the answer that the provision did not apply at the relevant time.
Accepting the attachment order as the whole of the State's case: Attachment and proclamation are distinct requirements, and the absence of a compliant proclamation is not visible on the attachment order.
Overlooking Section 26B(4): A Central Registry search showing no departmental filing is evidence, not merely an absence.
Leaving the mutation entry in place: A sale set aside without correction of the record of rights leaves the asset unsaleable in practice. Seek a direction with a timeline, as the Court gave here.
Assuming the priority defeats the dues: The State retains recourse to other assets and to surplus proceeds.
Key Statutory Provisions
Sections 13(2) and 13(4) of the SARFAESI Act, 2002: Demand notice to a borrower in default, and the measures available on default including taking possession.
Section 17 of the SARFAESI Act, 2002: Application to the Debts Recovery Tribunal against measures under Section 13(4), within forty-five days.
Section 26B(4) of the SARFAESI Act, 2002: Duty of Government and local authorities to file attachment orders with the Central Registry.
Section 26D of the SARFAESI Act, 2002: Chapter III enforcement conditional on registration of the security interest.
Section 26E of the SARFAESI Act, 2002: Priority to secured creditors after registration, subject to the Insolvency and Bankruptcy Code, 2016. In force from January 24, 2020.
Section 31B of the Recovery of Debts and Bankruptcy Act, 1993: Priority of secured creditors over Government dues. In force from September 1, 2016.
Section 192 of the Maharashtra Land Revenue Code, 1966: Proclamation and notice of sales, with the manner prescribed by Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967.
Sources and References
Section 26E of the SARFAESI Act, 2002: Priority to secured creditors
Section 26B of the SARFAESI Act, 2002: Registration by secured creditors and other creditors
Section 17 of the SARFAESI Act, 2002: Application against measures to recover secured debts
Maharashtra Land Revenue Code, 1966, Section 192, and the Maharashtra Realisation of Land Revenue Rules, 1967, Rule 11
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.
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