Primacy of Secured Creditors over State VAT Claims Post-Section 31-B – A Commentary on “Central Bank of India v. State of Andhra Pradesh” (2025)

1. Introduction

The Andhra Pradesh High Court, in Central Bank of India v. State of Andhra Pradesh (W.P. No. 12247 of 2024, decided on 21 May 2025), has delivered a significant ruling on the inter-se priority between:
  • secured creditors enforcing mortgage security under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), and
  • the State’s claim for unpaid Value Added Tax (VAT) under the A.P. VAT Act, 2005.

The petitioner bank sought to sell mortgaged assets already attached by the Debts Recovery Tribunal (DRT) to realise a debt of nearly ₹80 crore. The Commercial Taxes Department simultaneously attempted to auction the same assets to recover approximately ₹29 lakh of VAT dues, claiming a “first charge” under Section 26 of the A.P. VAT Act. The core question was: Which statutory charge prevails?

2. Summary of the Judgment

• The Court held that Section 31-B of the RDB Act (inserted in 2016) confers statutory priority on secured creditors over all other debts, including Government dues.
• Section 34 of the RDB Act, an overriding clause, ensures that this priority subsists “notwithstanding anything inconsistent” in any other law.
• Consequently, the Commercial Taxes Department’s attempt to sell the mortgaged property under Section 26 of the A.P. VAT Act was struck down.
• The writ petition of the Central Bank of India was allowed; the bank may proceed with the sale free from the State’s VAT charge.

3. Analysis

3.1 Precedents Cited

Central Bank of India v. State of Kerala (2009) 4 SCC 94 was the primary precedent discussed. In that decision the Supreme Court held that banks did not enjoy statutory first charge under the then-existing DRT or SARFAESI regime, and therefore State sales-tax first charges (Bombay Sales Tax Act §38-C; Kerala GST Act §26-B) prevailed. The AP High Court distinguished that precedent on a crucial factual-statutory change: the insertion of Section 31-B to the RDB Act in 2016, which was absent when the Supreme Court decided the 2009 case.

3.2 Legal Reasoning

1. Textual Priority: Section 31-B begins with the words “Notwithstanding anything contained in any other law for the time being in force…”, clearly granting overriding priority to secured creditors.
2. Co-existence with Section 34: Section 34, an earlier overarching clause, already provided general precedence of the RDB Act over inconsistent laws. Section 31-B adds a specific substantive right—priority in payment—curing the deficiency highlighted by the Supreme Court in 2009.
3. Statutory Hierarchy: Both the A.P. VAT Act (State legislation) and the RDB Act (Central legislation) contain non obstante clauses. Where two conflicting enactments have such clauses, courts resort to constitutional hierarchy and the principle of later-enacted-special law. Section 31-B, being a later Central amendment (2016) dealing specifically with priority of secured creditors, prevails over Section 26 of the A.P. VAT Act (2005).
4. Legislative Intent: Parliament consciously remedied the gap identified in Central Bank of India v. State of Kerala by introducing Section 31-B to “facilitate effective recovery of value locked in secured assets”. The Court honoured that intent.

3.3 Impact of the Judgment

• State Tax Departments: Cannot claim primacy over mortgage securities once Section 31-B applies. They must now queue behind secured creditors, unless a later central statute (e.g., Insolvency & Bankruptcy Code hierarchy) dictates otherwise.
• Banks & Financial Institutions: The ruling bolsters the enforceability of collateral, improving recovery prospects and reducing systemic risk, especially in high-value lending to SMEs.
• Borrowers & Guarantors: VAT arrears no longer erode the security value available to lenders. Borrowers must ensure separate provision for tax liabilities.
• Future Litigation: The decision will likely be cited across Indian High Courts where similar VAT/Sales-tax first-charge claims collide with Section 31-B or analogous provisions in SARFAESI/IBC. It may prompt states to revisit revenue-recovery mechanisms.

4. Complex Concepts Simplified

Secured Creditor

A lender holding a legal interest (mortgage, pledge, hypothecation) over a borrower’s asset to secure repayment.

First Charge

A legal right that ranks ahead of all other claims on the property. The holder gets paid first from sale proceeds.

Non Obstante Clause

A legislative device (“notwithstanding anything…”) that gives an enactment overriding effect over conflicting laws.

Recovery Certificate

An executable order issued by a DRT quantifying the debt recoverable by the bank.

Section 31-B (RDB Act)

Introduced in 2016; accords priority to secured creditors over Government dues.

5. Conclusion

The Andhra Pradesh High Court’s ruling firmly establishes that, after the 2016 introduction of Section 31-B, secured creditors outrank State tax departments’ statutory charges. The decision harmonises the pre-existing conflict between Central debt-recovery laws and State revenue statutes, aligning judicial interpretation with Parliament’s explicit mandate. Going forward, lenders can rely on mortgage securities with greater certainty, while state authorities must devise alternative safeguards for indirect-tax collection. The judgment thus marks a decisive precedent in Indian banking and revenue jurisprudence, likely to shape inter-creditor dynamics and influence legislative policy in the years ahead.