Priority of Mortgage Defaults

img2By Accommodation Times Archives

The housing finance companies and the Banks, whether in public sector or private, hereinafter referred to as the financial institutions, have been providing financial assistance for the purpose of acquiring residential houses, commercial premises or towards working capital against security of immoveable properties either by way of registered mortgage or equitable mortgage, as per the facts and circumstances of each case.  Though the title of immoveable properties, offered by way of mortgage, is thoroughly got examined by these financial institutions and all other aspects are gone into; but there is always a lurking fear in their mind that in case of default, if the security is enforced and the immoveable property is auctioned to recover the mortgage dues, the Government dues, if any, will have the priority over the mortgage dues.

This concept is, rightly or wrongly, based on the common law principle of the prerogative of the crown to recover its debt before all other creditors.  Crown debt means the debt due to the Government or the departments or the bodies such as Income Tax, Central Excise, Sales Tax, Municipal Corporations, MHADA, MIDC, CIDCO, State Financial Corporation, which derive this power of priority by way of statutory provisions.  This common law principle was being enforced by the various High Courts in our country till the year 1950 and, thereafter, this common law principle saved by Article 372 of the Constitution of India found incorporated, with the passage of time, in various statutes providing that the statutory dues shall have the first charge over the properties of the tax-payers.

 

However, the preferential right of the crown of recovery of debts over other creditors has been held as confined to ordinary or unsecured creditors under even the common law of England and the principles of equity and good conscience (as applicable to India) did not accord the Crown a preferential right for recovery of its debts over a mortgagee or a pledge of goods or a secured creditor, as held in Giles V/s Grover, that the Crown has no precedence over the pledge of goods and it confined only to ordinary or unsecured  creditors.





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