GST DUES DON'T GET PRIORITY IN INSOLVENCY PROCEEDINGS

In one of the recent pronouncements, National Company Law Appellate Tribunal (NCLAT), New Delhi has held that section 82 of the CGST Act, 2017, dealing with first charge to protect revenue in certain cases does not over-ride the provision of priority provided in section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and that the statutory charges does not grant the automatic 'secured' status in insolvency proceedings.

In State Tax Officer -6 Unit -92, Rajkot Versus Besto Tradelink Limited, Rishabh Chand Lodha (Insolvency Professional) and Saurashtra Specialities Private Limited - 2026 (7) TMI 105 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI (LB), following the judgment in Department of State Tax, Through the Dy. Commissioner of State Tax Versus Zicom Saas Pvt. Ltd. & Anr. - 2023 (2) TMI 1170 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI. NCLAT affirmed the NCLT Order, holding that where State Tax Department filed claim in CIRP process for GST dues asserting secured creditor status under CGST Act, 2017, section 82 of CGST Act cannot override priority mechanism under IBC and statutory charge does not grant secured status in insolvency, and further, department's conduct of not objecting during resolution process coupled with full implementation of Resolution Plan rendered challenge to treatment of its claim as unsecured was devoid of merit.

In the instant case, the only issue which arose for consideration in the Appeal was whether Section 82 of the CGST Act confers the status of a Secured Creditor upon the Appellant which is a State Government Department.

The submission of the Appellant was that by virtue of Section 82 of the CGST Act, 2017 a statutory first charge stood created over the assets of the Corporate Debtor and consequently the Appellant ought to have been treated as a secured creditor in the CIRP. It further contended that failure to accord such status renders the approved Resolution Plan violative of Section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016.

Section 82 of the CGST Act provides that notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.

On the other hand, Section 53 of the IBC, 2016 provides for distribution of assets in insolvency proceedings. It provides that:

"Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely :-

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following :-

(i) workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following :-

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date.

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

Further, the fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients, and the proceeds to the relevant recipient shall be distributed after such deduction."

The Appellate Tribunal observed that the Parliament, while enacting the CGST Act in the year 2017, was fully conscious of the existence and operation of the Insolvency and Bankruptcy Code, 2016. It consciously incorporated a saving clause making the statutory charge under Section 82 subject to the provisions of the Code. The legislative intent is therefore explicit and unambiguous. The first charge contemplated under Section 82 is not absolute. It operates subject to the provisions of the Insolvency and Bankruptcy Code. Consequently, once insolvency proceedings commence under the Code, the treatment of claims, determination of priorities and distribution of proceeds are governed by the statutory scheme of the Code.

The claim of the Appellant to be treated as Secured Operational Creditor was based on interpretation of Section 82 of the CGST Act, 2017 which clearly States that the charge on the property shall be considered as first charge but in case of treatment under IBC, 2016 the same would be considered as per provisions of the Code. This meant that the dues of the Central or State Government would be treated in accordance with Section 53(1)(e)(i) in case of proceedings under the IBC Code.

The Appellate Tribunal was therefore, of the considered opinion that Section 82 itself furnishes the answer to the controversy raised by the Appellant. The statutory charge contemplated therein cannot override the insolvency framework nor can it alter the priority mechanism prescribed under the IBC Code.

Further, during the moratorium period, scrutiny proceedings resulted in additional tax liability of the corporate debtor for which the Appellant requested the RP to update the liability and update the claim of the department. However, the RP rejected such updated claim. The Appellate Tribunal held that in view of the moratorium operating during the CIRP proceedings no scrutiny orders could have been passed by the Appellant imposing further liability upon the Corporate Debtor. NCLAT found no infirmity in the decision of the RP rejecting such additional claims.

It also noted that the Appellate Tribunal further notes that the resolution plan has been fully implemented. Payments to all creditors as per resolution plan have been made. The Monitoring Committee constituted for implementation of resolution plan has already been dissolved.

In result, NCLAT dismissed the revenue appeal concluding that GST dues cannot get the status of secured creditor under the IBC Law.