The government is seeking an amendment to the law to ensure that tax arrears are given precedence over the dues of creditors for sick or non-operational companies.

The revenue department is approaching the Bombay high court against the decision of the Debt Recovery Tribunal, Mumbai, which awarded the first right of recovery to lenders to Daewoo Motor India Ltd. The company owes the government around Rs 1,000 crore (Rs 10 billion) as indirect tax arrears.

"We will shortly file a writ petition in the high court, seeking priority in clearance of statutory dues of the government over those of banks and financial institutions," a government official told Business Standard.

The official said the department had decided not to approach the Debt Recovery Appellate Tribunal since the appeal was not against the facts of the case but dealt with a point of law. "In case we do not get relief we may even consider amending the law," he added.

As per the present provisions of the Companies Act, workmen have the first charge, followed by secured creditors.

The court's ruling would have far reaching implications since a number of cases pending in DRTs, the Board for Industrial and Financial Reconstruction and winding up cases in courts would be affected.

It is also expected to make banks and FIs wary of lending to companies since they would have to contest with the government on settlement of their dues, said a banker.

Even in case of the stock scam related cases of the late Harshad Mehta and Ketan Parekh, which involve direct tax arrears of around Rs 25,000 crore (Rs 250 billion), the revenue department and banks are battling over the claims.