Winding-up priority prevails over State tax first charge; recovery cannot disturb company court sale free of encumbrances.

A State statutory first charge for sales tax dues under the Kerala General Sales Tax Act cannot override the liquidation priority scheme in the Companies Act, 1956. In winding up, section 529A gives overriding priority to workmen's dues and secured creditors, and section 530 makes tax claims subordinate to that scheme. Section 537(2) also does not permit the State to continue recovery against property already sold by the company court free of encumbrances, because such recovery would unsettle the liquidation process and the court-controlled distribution of assets. The sale and priority determination remain governed by the company court's liquidation framework.

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Issues: (i) Whether the first charge created in favour of the State under section 26B of the Kerala General Sales Tax Act, 1963 could prevail over the priority scheme in winding up under sections 529A and 530 of the Companies Act, 1956. (ii) Whether section 537(2) of the Companies Act, 1956 enabled the State to continue recovery proceedings against property sold by the company court free of encumbrances.

Issue (i): Whether the first charge created in favour of the State under section 26B of the Kerala General Sales Tax Act, 1963 could prevail over the priority scheme in winding up under sections 529A and 530 of the Companies Act, 1956.

Analysis: Section 26B created a statutory first charge for sales tax dues, but section 529A of the Companies Act, 1956 gives overriding priority in winding up to workmen's dues and debts due to secured creditors, while section 530 makes tax dues payable only subject to section 529A. The statutory schemes could not operate together in a winding up where assets are to be distributed under the Companies Act. The State legislation could not displace the Parliamentary mandate governing distribution of assets in liquidation.

Conclusion: The priority under section 529A prevailed, and the State's claim for tax dues remained subject to the winding up scheme under the Companies Act, 1956.

Issue (ii): Whether section 537(2) of the Companies Act, 1956 enabled the State to continue recovery proceedings against property sold by the company court free of encumbrances.

Analysis: Section 537(2) saves tax recovery proceedings from the avoidance rule in section 537(1), but it did not assist the State on these facts because the recovery had not advanced beyond attachment and the property had already been sold by the company court free of encumbrances for the benefit of all creditors. Allowing continued recovery against the property would undermine the sale and the company court's distribution scheme, and priority questions had to be decided by the company court.

Conclusion: The State could not rely on section 537(2) to disturb the sale or pursue the property contrary to the winding up process.

Final Conclusion: The impugned order was upheld and the State's appeal failed because tax dues were subordinate to the liquidation priorities under the Companies Act, 1956, and the recovery proceedings could not survive against the property sold by the company court.

Ratio Decidendi: In a winding up, a State first charge for tax dues cannot defeat the overriding priority given by section 529A of the Companies Act, 1956, and tax recovery provisions cannot be used to unsettle a sale effected by the company court in liquidation.

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