Allahabad High Court: Secured Creditors’ Dues Take Priority Over Government Revenues Under SARFAESI Act
Court says banks and financial institutions have first charge over assets once security interest is registered
Judgment clarifies Section 26E of SARFAESI Act, settles disputes between lenders and government authorities
By Our Legal Reporter
New Delhi: December 13, 2025:
In a landmark judgment, the Allahabad High Court has ruled that secured creditors’ dues must take priority over government revenues under Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The case involved the State Bank of India (SBI) and the Sub-Registrar of Nighdu, Karnal, where property registration was stalled due to competing claims between the bank and government authorities.
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This ruling provides clarity on a long-debated issue and strengthens the rights of banks and financial institutions in recovering debts from defaulting borrowers.
Background of the Case
- SBI had initiated recovery proceedings against a defaulting borrower under the SARFAESI Act.
- The property was auctioned, but the Sub-Registrar refused to register the sale deed, citing government revenue claims.
- SBI approached the High Court, arguing that secured creditors have statutory priority under Section 26E.
- The Court agreed, directing that the bank’s claim must be honoured before government dues.
Court’s Observations
The Division Bench emphasized:
- Section 26E of SARFAESI Act gives secured creditors a “first charge” over secured assets once the security interest is registered.
- This provision overrides other laws, including claims of government revenue authorities.
- The intent of the legislature is clear: banks and financial institutions must be able to recover debts efficiently.
- Government dues, while important, cannot supersede the statutory rights of secured creditors.
The Court also noted that numerous litigations have arisen on this issue, despite the law being settled after the 2020 notification of Section 26E.
Legal Principles
- SARFAESI Act, 2002: Allows banks to recover loans by selling secured assets without court intervention.
- Section 26E (inserted in 2016, notified in 2020): Establishes priority of secured creditors over all other debts, including government revenues.
- Overriding effect: Section 26E overrides conflicting provisions in other laws, ensuring lenders’ rights are protected.
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Impact on Banks and Borrowers
This ruling has major implications:
- For banks: It strengthens their ability to recover loans quickly, reducing non-performing assets (NPAs).
- For borrowers: It underscores the importance of timely repayment, as banks can enforce security without fear of government claims delaying recovery.
- For government authorities: It clarifies that their claims rank below secured creditors once security interest is registered.
Expert Opinions
Legal experts welcomed the ruling:
- Banking lawyers said the judgment provides certainty and reduces litigation.
- Economists noted that stronger recovery rights will improve credit discipline and reduce NPAs.
- Policy analysts argued that the ruling aligns with India’s goal of strengthening its financial sector.
Similar Cases
- The Punjab & Haryana High Court recently ruled that secured creditors’ dues take priority over government revenues under Section 26E.
- Courts across India have consistently upheld the supremacy of Section 26E, reinforcing lenders’ rights.
- These rulings collectively settle the debate and ensure uniformity in application of the law.
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Broader Implications
The Allahabad High Court’s decision has wider significance:
- For the financial sector: It boosts confidence among lenders, encouraging more credit flow.
- For borrowers: It serves as a warning that defaulting can lead to swift enforcement.
- For policymakers: It highlights the importance of clear laws to reduce disputes between banks and government authorities.
This case also underscores the judiciary’s role in strengthening India’s financial ecosystem by ensuring effective debt recovery mechanisms.
Conclusion
The Allahabad High Court’s ruling that secured creditors’ dues take priority over government revenues under Section 26E of the SARFAESI Act is a landmark in banking law. By clarifying that banks have the first charge over secured assets, the Court has reinforced the principle of efficient debt recovery.
For India’s financial system, the message is clear: banks and financial institutions must be empowered to recover loans swiftly, and government claims cannot obstruct this process.
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