Section 26E of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
1[26E. Priority to secured creditors.--Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. Explanation.--For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.]
Summary
- Once a security interest is registered, the secured creditor gets the highest priority for getting paid back from the sale of the asset.
- The registered secured debt must be paid before all other debts.
- The registered debt even beats government claims, including revenues, taxes, cesses, and local authority rates.
- There is an exception if the borrower is going through formal bankruptcy under the Insolvency and Bankruptcy Code, 2016, in which case those specific bankruptcy rules take over.
Practical examples
FAQ
1. Do government taxes get paid before bank loans?
No, under this rule, registered secured creditors get paid before government taxes and revenues.
2. Does registration matter for this priority?
Yes, the priority only applies after the security interest has been officially registered.
3. What happens if the borrower is formally bankrupt under the new bankruptcy code?
If proceedings are pending under the Insolvency and Bankruptcy Code, 2016, the priority of payment follows the rules of that Code instead.
Test yourself
Q1.Under Section 26E of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, after a security interest is registered, how does the secured creditor's debt rank against a local authority's claim for unpaid property rates?
Q2.Under Section 26E of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, what triggers the special priority status for a secured creditor's debt?
Q3.Under Section 26E of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, what happens to this priority rule if the borrower is facing formal bankruptcy proceedings under the Insolvency and Bankruptcy Code, 2016?
Q4.Under Section 26E of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which of the following government debts is explicitly mentioned as being lower in priority than a registered secured debt?