The doctrine is also known as the ‘Doctrine of Priority of Crown Debts’. It has its origin in the Common Law of England. It is expressed in the legal maxim ‘Quando Jus Domini Regis Et Subditi Concurrunt Jus Regis praeferri debet’, which means where the title of the King and that of subjects concur, the King’s title prevails over the title of the subjects. In other words, the statutory dues of the government shall take priority over the dues of the citizens and citizens are bound to first pay the statutory dues before payment to the creditors. Way back in the year 1938, in the matter of Manickam R Chettiar, AIR 1938 Mad 360, a decree was passed in favour of an individual who was sought to be executed. Income Tax authorities staked their claim stating that they should be paid income tax dues of the debtor in preference to the creditor. Hon’ble Madras High Court held that the Crown had priority with regard to its debts over all other debts. It was further held that though the procedure laid down in the Income Tax Act was not followed, even then, the court had inherent jurisdiction under Section 151 of the Code of Civil Procedure to recognise the claim of the Crown.
In another case of Builders Supply Corporation vs Union of India, AIR 1965 SC 1061, it was held by Hon’ble Supreme Court that the doctrine has been consistently recognised by all courts in India and that it amounts to ‘Law in Force’ within the meaning of 372 (1) of the Constitution of India. It was further held that recovery of tax due from citizens must take precedence and priority over the unsecured debts from the citizens to their other private creditors.

In the leading case of Dena Bank vs Bhikhabhai Prabhudas Parekh and Co 2000(5) SCC 694, Hon’ble Supreme Court held that the statutory dues will have priority over the dues of the private secured creditor and held further that:

  1. Common Law doctrine about the priority of Crown Debts constitutes ‘Law in Force’ within the meaning of Article 372 (1) of the Constitution of India and continues to be in force.
  2. There is a consensus of judicial opinion that arrears of tax due to the state can claim priority over private debts.
  3. The basic justification for the claim of priority of State Debts is the rule of necessity and the wisdom of conceding to the state the right to claim priority in respect of its tax dues.
  4. The doctrine may not apply in respect of debts due to the state if they are contracted by citizens in relation to commercial activities, which may be undertaken by the state for achieving socio-economic good.

Impact of doctrine on the recovery process of banks

The biggest malady of banking sector is the absence of any effective legal remedy to recover their ever-increasing dues. So far as the recovery mechanism of banks and financial institutions (FIs) is concerned, our legal system has not kept pace with changing commercial practices and financial sector reforms. To tackle the malaise, Debts Recovery Tribunals (DRTs) were established on the recommendation of M Narasimham and T Tiwari. Initially, DRTs held some ground, but after a few years, it became apparent that the DRTs did not prove to be very fruitful and failed to serve the purpose for which they were established. Looking at the grim scenario of recovery, the Government of India constituted Narasimham Committee and Andhyarujina Committee to examine the Banking Sector reforms and recommend the need for change in the legal system relating to the recovery of dues of banks and FIs. These committees recommended the enactment of new legislation for securitisation and empowering the banks and FIs to take possession of the securities and to sell them without any intervention of the court. Accordingly, the SARFAESI Act 2002 was enacted on the recommendations of these committees. SARFAESI Act has fairly improved the recovery position of banks and FIs. However, the doctrine of Priority of State Debt has been a big stumbling block in the way to recovery of the banks and FIs.

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