Court upholds primacy of secured creditor in dues’ recovery


Gandhinagar : The Gujarat High Court has upheld the right of a secured creditor to a security for recovery of dues from a company as against an unsecured creditor, including a central government department.

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A bench of Chief Justice S.J. Mukhopadhaya and Justice K.M. Thaker ruled so while granting relief to Kotak Mahindra Bank whose bid to take possession of the assets of a company was opposed by the central excise and customs (CEC) department.

The Kotak Mahindra Bank had moved to take possession of the assets of a company after it failed to pay its dues. Even as it was in the process of doing so, the customs and excise department moved in to confiscate the plant machinery and other movable and immovable assets of the company.

Aggrieved by the decision of the central government department to confiscate the company’s assets, the bank sought the intervention of the high court.

The court, in its order Friday, clarified that the government cannot trifle the “out of court” remedy available to secured creditors while enforcing its security under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

The court held that the government cannot claim priority for settlement of its own debt over the secured creditors, exercising its rights under the securitization act.

The court ruled that the crown debt is an unsecured debt which may get a priority over another unsecured creditor but not over a secured creditor.

Granting relief to the bank to secure possession of the assets of the company, the court ruled that there was no specific provision in the Central Excise Act or the rules framed thereunder whereby the central government can claim “first charge”.

The petition was related to recovery of dues from Amod Petrochem Pvt. Ltd. and Amod Industries Ltd. The process for recovery was initiated in 2007.