Author: S.B.Theerthana,Chennai Dr.Ambedkar Government Law College – Puduppakam
To the point
In the case of Union Bank of India vs The Authorised Officer, Canara Bank (2017), heard by the Debt Recovery Tribunal, Chandigarh, a dispute arose between the two banks regarding the recovery of dues from a mortgaged property. Both banks had granted loans against the same property, and Canara Bank proceeded to sell the property under the SARFAESI Act to recover its dues. However, Union Bank claimed that it held the first charge over the property and therefore had priority in recovering its loan amount. The Tribunal agreed with Union Bank, holding that the bank with the first registered charge is entitled to recover its dues before any other creditor. Thus, Union Bank was allowed to recover its amount first, and Canara Bank could claim only from the remaining balance.
Abstract
This case deals with a dispute between Union Bank of India and Canara Bank over the recovery of loan amounts from a property that was mortgaged to both banks. Canara Bank sold the property under the SARFAESI Act to recover its dues, but Union Bank claimed that it had the first charge on the property and should be paid first. The Debt Recovery Tribunal (DRT) in Chandigarh agreed with Union Bank and held that the bank with the first registered charge has the legal right to recover its money first. This case shows how important it is for banks to clearly register their charges and follow proper procedures when dealing with secured loans. It also explains how courts resolve conflicts when more than one bank claims the same property for recovery.
Use of Legal Jargon
In the case of Union Bank of India vs The Authorised Officer, Canara Bank, the primary issue revolved around the enforcement of security interest under the SARFAESI Act, 2002. Both banks were secured creditors, having created equitable mortgages over the same immovable property. However, the conflict arose when Canara Bank, as a secured creditor, exercised its statutory right under Section 13(4) of the SARFAESI Act to sell the property without judicial intervention. Union Bank contended that it held a prior charge, and therefore, its right to claim recovery should prevail based on the doctrine of “first in time, first in right.” The Debt Recovery Tribunal upheld this contention, reiterating that priority of charge determines the order of debt satisfaction among multiple secured creditors. The case reinforced the importance of proper charge registration under the Companies Act and the role of the Central Registry (CERSAI) in maintaining transparency in secured transactions. This judgment illustrates how statutory rights under SARFAESI must align with principles of equitable priority in inter-bank lending disputes.
The Proof
In this case, the legal proof in favor of Union Bank of India was based on the principle of priority of charges, which is well-established under Indian banking and insolvency laws. Union Bank had created and registered its equitable mortgage over the property before Canara Bank, giving it a first charge. Under Section 13(9) of the SARFAESI Act, 2002, when more than one secured creditor is involved, the sale of the secured asset can only happen with the consent of at least 60% of the secured creditors (in value), and the distribution of sale proceeds must follow the order of priority. In this case, although Canara Bank conducted the sale under SARFAESI, Union Bank’s first charge meant that its dues were to be satisfied first. The Debt Recovery Tribunal (DRT) accepted this and ruled that Union Bank had a legally enforceable preferential right over the proceeds. Thus, the legal proof lies in the registered charge documents, the timing of the mortgage creation, and the statutory backing under SARFAESI, which clearly upheld Union Bank’s superior claim.
Case Laws
1.ICICI Bank Ltd. v. Sidco Leathers Ltd. (2006)
The Supreme Court held that when there are multiple secured creditors, the one who has the first charge over the property has a superior legal right to recover its dues before others. The Court explained that the principle of “first in time, first in right” must be followed when dealing with the distribution of sale proceeds. This means that the bank which first created and registered its charge on the secured asset has to be given priority during recovery. This ruling directly supports the outcome in Union Bank of India vs The Authorised Officer, Canara Bank, where Union Bank, being the first charge-holder, was given preference in recovery over Canara Bank. The ICICI Bank case, therefore, stands as a strong precedent that helps settle inter-bank disputes involving overlapping charges on the same asset.
2.State Bank of India v. State of Maharashtra & Others
The Supreme Court clarified that secured creditors under the SARFAESI Act, 2002 have priority over government dues, such as taxes or statutory charges, unless a special statute clearly gives the government a first charge. The Court emphasized that if a bank has a valid mortgage or charge over a property, it cannot be pushed aside just because government departments are also claiming dues. This case is important because it reinforces the legal strength of secured creditors in recovering their loans through SARFAESI, and also supports the idea that once a bank has a registered charge, its rights are to be respected during asset recovery. In Union Bank of India vs Canara Bank, although the conflict was between two banks, the principle still applies: the priority of charge determines who gets paid first, and any later claim including by another bank or the government must wait.
3.Central Bank of India v. State of Kerala & Others
The Supreme Court dealt with a conflict between secured creditors and statutory dues (like sales tax) claimed by the state. The Court ruled that unless a specific law grants priority to government dues, a secured creditor’s right through a registered mortgage will prevail. The Court strongly emphasized that general government claims cannot override the legal rights of a creditor who has a valid charge over a property. This judgment supports the importance of charge registration and secured lending practices. In the context of Union Bank of India vs Canara Bank, this case further confirms that the creditor with the earlier charge has a better legal position, even when there are competing claims. It reinforces that the timing and registration of the charge are crucial in deciding who gets paid first during asset recovery.
4.Edelweiss Asset Reconstruction Co. Ltd. v. Sai Shraddha Realties Pvt. Ltd.
The Bombay High Court addressed a situation where multiple secured creditors had charges over the same property. The Court clearly held that when such a property is sold under the SARFAESI Act, the sale proceeds must be distributed according to the priority of the charges. The bank or financial institution that holds the first charge must be paid first, and any remaining amount may then be shared by other creditors. This case is highly relevant to Union Bank of India vs Canara Bank, where Union Bank claimed it had the first charge on the mortgaged property. The principle in this case supports that claim, showing that priority among banks is not just a formality but a legal right that affects who gets their money first when a property is sold. It also highlights the need for clear documentation and charge registration.
5.Kotak Mahindra Bank Ltd. v. District Magistrate & Others
The Supreme Court reaffirmed that banks have the right to enforce their security interest directly under Section 13 of the SARFAESI Act, 2002, without needing court permission. However, the Court also emphasized that while exercising this power, banks must strictly follow the procedural rules and respect the rights of other secured creditors. This means that even though a bank can sell the asset without court interference, it cannot ignore the hierarchy of charges if another bank has a first charge, it must be given priority in receiving the sale proceeds. In the Union Bank of India vs Canara Bank case, this principle applies directly. Although Canara Bank exercised its right under SARFAESI to sell the property, it still had to respect Union Bank’s prior and registered first charge, and the DRT rightly upheld that priority.
Conclusion
This case highlights the critical importance of charge registration and priority of rights among secured creditors under the SARFAESI Act, 2002. The Debt Recovery Tribunal rightly held that Union Bank, having the first registered charge, was legally entitled to recover its dues before Canara Bank, even though Canara Bank had initiated the sale of the secured asset. This case reinforces the legal principle that the “first charge-holder” always has the first right of recovery, and any subsequent secured creditor must wait until the earlier dues are cleared. It also reflects the need for financial institutions to maintain proper documentation, register charges timely, and respect inter-creditor arrangements. The judgment serves as a strong precedent for future disputes involving multiple banks and ensures that the priority structure among lenders is maintained as per law.
FAQs
1.What was the main issue in the Union Bank vs Canara Bank case?
The main issue was whether Canara Bank could retain the full sale proceeds of a mortgaged property when Union Bank had a prior registered charge on the same property
2.What is a ‘first charge’ in banking law?
A first charge means the creditor who registered the mortgage first has the primary right to recover money from the sale of the secured asset before other creditors.
3.What role does the SARFAESI Act play in this case?
The SARFAESI Act allows banks to recover dues by selling secured assets without court intervention, but they must follow rules like respecting the priority of charges among secured creditors.
4.What did the Debt Recovery Tribunal (DRT) decide in this case?
The DRT held that Union Bank’s prior charge must be honored, and Canara Bank could not keep the entire amount from the property sale without paying Union Bank first.
5.Why is this case important for banking and finance law?
It sets a precedent for enforcing inter-creditor rights, ensuring that the order of charge registration determines the priority of repayment, preventing unfair recovery by later creditors.
