Section 26E SARFAESI: Priority of Secured Creditors

For years a lender's security could be trumped by government dues, because the Act said nothing about priority. The 2016 amendment changed that decisively, though Section 26E itself was brought into force only on 24 January 2020. Section 26E gives a secured creditor, once it has registered its security interest, priority over all other debts and over the revenues and taxes of the Government. It is one of the most significant reforms the Act has seen. This note sets out the provision, the registration condition it carries, and why it matters.

1. The Provision

Figure 1: Priority over debts and government dues

• The non-obstante, s.26E. Notwithstanding anything in any other law, after registration of the security interest, the debts due to a secured creditor are paid in priority.
• Over all other debts. The secured creditor's dues rank ahead of all other debts of the borrower, a sweeping priority against ordinary and unsecured creditors.
• Over government dues. They also rank ahead of all revenues, taxes, cesses and other rates payable to the Central or State Government or a local authority.
• Inserted 2016, in force 2020. Section 26E was inserted by the 2016 amendment but brought into force on 24 January 2020, and it operates once the security interest is registered with the Central Registry (Topic 44)

2. The Registration Condition

Figure 2: Register first, then priority

• Register the interest. The security interest must be registered with the Central Registry under the Chapter IVA scheme (ss.23 to 26D) (Topics 42, 43)
• Then priority follows. Section 26E gives priority only after registration of the security interest, so registration unlocks the priority.
• Unregistered, no priority. A secured creditor that fails to register loses not only the right to enforce under s.26D but this priority too (Topic 44)
• The incentive sharpened. Because enforcement, notice and priority all turn on registration, the secured creditor has every reason to register promptly.

3. The Significance

Figure 3: A decisive shift in the lender's favour

• Reverses the old position. Before s.26E took effect, a secured creditor had no statutory priority under SARFAESI over state tax first charges; s.26E reverses that (Topic 50)
• A game-changer for lenders. It gives a registered secured creditor a clear, statutory first claim on the proceeds, improving recovery and credit discipline.
• Read with s.31B RDB Act. A parallel priority was added as s.31B of the RDB Act, so secured creditors have priority under both recovery regimes (Topic 75)
• Subject to the IBC. In insolvency the IBC waterfall under s.53 governs distribution, so the s.26E priority operates outside an IBC process (Topic 76)

4. Frequently Asked Questions

What priority does Section 26E give to a secured creditor?

Section 26E provides that, notwithstanding anything contained in any other law, after the registration of the security interest the debts due to a secured creditor shall be paid in priority over all other debts and over all revenues, taxes, cesses and other rates payable to the Central Government, the State Government or a local authority. Inserted by the 2016 amendment and in force from 24 January 2020, it gives a registered secured creditor a statutory first claim on the proceeds of the secured asset, ahead of ordinary creditors and of government dues. The priority is conditional on registration of the security interest with the Central Registry, so a creditor that has not registered cannot claim it.

Does Section 26E give secured creditors priority even over tax dues?

Yes, where the security interest is registered. Section 26E expressly gives a registered secured creditor priority over all revenues, taxes, cesses and other rates payable to the Central or State Government or a local authority, which reversed the earlier position under which state tax first charges could prevail over a secured creditor. A parallel provision, Section 31B of the Recovery of Debts Act, gives the same priority in the recovery regime. The priority is over the distribution of the proceeds; it does not extinguish the government dues, which rank after the secured creditor. In an insolvency, however, distribution follows the waterfall under Section 53 of the Insolvency and Bankruptcy Code rather than Section 26E.

5. Related Topics

• Topic 50: Section 26E and Government Dues. The priority contest and the case law.
• Topic 44: Effect of Registration and Enforcement. Why registration unlocks priority.