Liquidation waterfall prevails over statutory tax charge, and government dues do not become secured debt in insolvency.

Government tax dues do not become secured debt merely because a statutory first charge is asserted under state sales-tax law; under the Insolvency and Bankruptcy Code, the liquidation waterfall in Section 53, read with the overriding effect of Section 238, governs priority. A statutory attachment over corporate debtor immovable property cannot continue after a liquidation sale to an auction purchaser who has paid full consideration through the insolvency process, and the asset must be conveyed free of the encumbrance. The tax authority's claim therefore ranks as government dues, not a secured creditor claim, and the purchaser's title and possession are protected.

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Issues: (i) Whether the State Tax Department's attachment and claimed charge over the corporate debtor's immovable properties could continue after liquidation sale in favour of the auction purchaser. (ii) Whether government tax dues ranked as secured debt so as to displace the liquidation waterfall under the Insolvency and Bankruptcy Code, 2016.

Issue (i): Whether the State Tax Department's attachment and claimed charge over the corporate debtor's immovable properties could continue after liquidation sale in favour of the auction purchaser.

Analysis: The liquidation sale was made after the secured lenders relinquished their security interest and the sale proceeds were distributed in accordance with the liquidation framework. The amount claimed by the State Tax Department arose from statutory dues and not from any consensual security created by transaction. A charge created by operation of law did not entitle the department to retain an encumbrance over assets already sold in liquidation, particularly when the purchaser bought the property through the statutory process and had paid the full consideration. The Code's liquidation scheme required the assets to be conveyed free from such continued attachment.

Conclusion: The attachment/charge could not survive the liquidation sale, and the State Government authority was directed to remove it from the revenue records. The auction purchaser was entitled to peaceful possession.

Issue (ii): Whether government tax dues ranked as secured debt so as to displace the liquidation waterfall under the Insolvency and Bankruptcy Code, 2016.

Analysis: The distribution of liquidation proceeds is governed by Section 53 of the Code, which places secured creditors who have relinquished security, and government dues, in different priority slots. Government dues are not secured debt within the meaning of the Code merely because a statutory first charge is asserted under the Gujarat Value Added Tax law. The statutory priority under Section 53 and the overriding effect of Section 238 governed the matter, and the claimed State dues fell within the category of government dues under Section 53 rather than secured creditor claims.

Conclusion: The State Tax Department was not entitled to be treated as a secured creditor for priority in liquidation, and its dues ranked after the secured creditors under the Code.

Final Conclusion: The application succeeded, the statutory charge was ordered to be removed, and the purchaser's title and possession were protected under the liquidation regime.

Ratio Decidendi: In liquidation under the Insolvency and Bankruptcy Code, government tax dues do not become secured debt merely because a statutory charge exists, and the liquidation waterfall under Section 53 prevails over inconsistent state-law recovery claims.

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