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Sale under SARFAESI Act is invalid when State has First Charge on the Property

In GMG Engineers & Contractor Pvt. Ltd v. State of Rajasthan & ors, the Rajsthan High Court held that the sale made under the provisions of the Securitisation and Reconstruction of Financial Assets and  Enforcement of Security Interest Act, 2002 is cannot be deemed as valid when State sales tax Department has First Charge on the Property.

Dismissing the petition, Justice M.N Bhandari said that “The State dues may be without a provision of first charge and in that situation, the secured creditors would have priority over the State dues and,
accordingly, amended provision is to be given interpretation. It cannot, however, nullify a provision for first charge on the property. The first charge on the property creates right even as per the Act of 1882. It has  already been observed that if intention of the Central Government was to nullify first charge, the language of amended provision would have been in the manner indicated by the Apex Court in the case of Central Bank of India (supra). It is otherwise a case where attachment of the property in pursuance of first charge of the State Government is much prior to the amended Act of 2002 and 1993 thus those amendments would not apply even if subsequently auction of the property was made. It is nothing but auction of the property already attached by the Government, that too, after initiation of proceedings under the Act of 1956.”

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