The Hindu Business Line : IBA wants priority for secured creditors

Mumbai, Aug. 12 In a bid to protect the interests of its constituents, the Indian Banks’ Association has moved the Government to effect suitable amendments to two statutes so that the claims of secured creditors on borrowers’ assets have priority over statutory dues such as State sales tax, electricity and royalty payments.

The association has sought modifications to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, and the Recovery of Debts Due to Banks and Financial Institutions (RDBF) Act, 1993.

The IBA’s move has been prompted by the Supreme Court’s judgment (in a Central Bank of India Vs the State of Kerala case) that if there is a statutory first charge created over the assets of an assessee to tax, such statutory first charge will prevail over the claims of the secured creditors.

Statutory dues

“We have sought amendments to the Sarfaesi Act and the RDBF Act so that the claims of secured creditors have priority over statutory dues. Dues of labour and secured creditors would, however, rank pari passu when it comes to charge over the assets of borrowers,” said Mr M.R. Umarji, Chief Legal Adviser, IBA.

To buttress his argument, he pointed out that a Madhya Pradesh High Court judgment had ruled that a buyer of a property cannot be denied electricity because the seller had not cleared his/ her dues to the State power utility.

According to bankers’ granting priority to secured creditors will encourage lending and promote economic growth.

The IBA wants to incorporate provisions of the Companies Act relating to the dues of labour and secured creditors, which have a pari passu charge on the assets of the company under winding up proceedings, in the Sarfaesi Act.

It also wants the definition of secured creditors in the Sarfaesi Act and RDBF Act to be expanded to include non-banking finance companies and housing finance companies.

Currently, only banks and financial institutions are defined as secured creditors under the Sarfaesi and RDBF Acts.