The Supreme Court will decide whether recovery of government dues, including income tax and excise, should get priority over liabilities of banks and other creditors while dividing the assets of a sick company.

Tax authorities have moved the apex court challenging the Punjab and Haryana High Court which held that excise dues cannot get priority over liabilities of secured or unsecured creditors, banks and financial institutions.

A bench headed by Justice S H Kapadia issued notice to defunct company Midland Steels & Alloys Pvt Ltd, on whose petition the High court had passed the judgement.

The Central Excise Division, Ludhiana, in its appeal submitted the High Court had failed to appreciate that as per the provisions of Customs Act 1962 and Central Excise Act 1944, its dues had precedence over other creditors - secured or unsecured.

The High Court's observation that "crown debts" (debt owed to the state) can only get priority when it was prior in time to that of unsecured credit was wrong in law, Additional Solicitor General Vikas Singh said.

According to the petition, financial institution becomes the owner of a sick company by operation of law and was liable to pay the company's dues to the government by way of taxes and excise duty.

The department also referred to the apex court's order in a case involving Dena Bank against Bhikhabhai Prabuda Parekh & Company, where it had held that arrears of tax dues to the state can claim priority over private debt.

Midland, which was registered with the Central Excise department for the manufacture of non-alloy steel ingots, had claimed abatement under the Central Excise Act, 1944 after its closure in June 2001. While its claims were rejected by the department, a tax tribunal had allowed abatement.

The excise department had initiated recovery proceedings and an officer appointed to sell its movable and immovable property had issued attachment certificate to Andhra Bank for attachment of the property for recovery of government dues.

Midland had approached the High Court seeking a direction to Andhra Bank to dispose of its assets and pay its excise dues of Rs 4.12 lakh in priority over other dues.