2022 (5) TMI 970 - HC - VAT and Sales Tax

Court rejects priority claim over secured creditors & workmen's dues, upholding Companies Act, 1956 in liquidation.

The court dismissed the applicant-department's claim for priority of payment over other secured creditors and workmen's dues, affirming the supremacy of ... Preferential payments of state claim over workmen and other creditors - Seeking priority and preference over other creditors and to release the amount said to be due in favour of the applicant-department - preferential treatment or priority to be accorded to the State claim/crown’s debt vis-a-vis the claim of workmen and other secured creditors - HELD THAT:- The issue of priority of secured creditor’s debt over that of the State Government, commonly known as crown’s debt, has been examined by different High Courts and the Hon’ble Supreme Court. This Court deems it proper to narrate the facts and law, with respect to different High Courts, as how the priority issue has been dealt with by them. The Gujarat High Court in the case of BANK OF INDIA VERSUS STATE OF GUJARAT & 3 OTHER (S) [2020 (1) TMI 1197 - GUJARAT HIGH COURT] again considered the provisions of Section 48 of the Value Added Tax Act, 2003 vis-àvis the provisions contained in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short ‘the RDB Act’) and whether Section 31B of the RDB Act give priority to the secured creditor to realize its dues over the Government debts. The Gujarat High Court held that the secured creditor will have priority over the dues of the State Government. This Court finds that Article 246 of the Constitution of India opens with a non-obstante clause and the Parliament has been given exclusive power to make laws in respect of matters enumerated in List-I of the 7th Schedule, known as Union List - This Court finds that both the Parliament and the State legislature are supreme in their respective assigned fields and it becomes duty of the Court to interpret the legislations made by both the Parliament and the State legislature in such a manner as to avoid any conflict. This Court in no way finds that the State had no competence to insert Section 47 in the Act of 2003 and the same law is in no way useless or redundant, however, if the Central Act, as enacted by the Parliament, provides for proceeds of the assets of a Company being wound up, to be given to the secured creditors and the workers, then the same has to be distributed pari passu among others, as per the priority given in Section 529A of the Act of 1956 - this Court finds that even the preferential payments to the revenues, taxes, cesses, etc. due from the Company in winding up to the Central or the State Government or the local authority, will be subject to the provisions of Section 529A of the Act of 1956. This Court, if accepts the plea of the learned Advocate General, in a way, would be re-writing Section 530 of the Act of 1956 and the same cannot be done by this Court. The legislature-Parliament, if has brought any change in respect of the preferential payment and only the dues of workmen have been given priority, no grievance can be allowed to be raised by any other person including the State. This Court finds that the claim of the applicant- State to give them priority for payment of their dues over other secured creditors, cannot be granted - Application dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a State statute provision creating a 'first charge' on a debtor's property for tax dues (non-obstante clause) can override or take priority over the preferential payment scheme in the Companies Act, 1956, specifically Sections 529A and 530, in a company winding-up. 2. Whether the Official Liquidator was obliged to treat the State's VAT claim as a preferential/secured claim and pay it prior to distribution to workmen and secured creditors under Sections 529A/530 of the Companies Act, 1956. 3. The proper approach to resolving apparent conflict between a State law with a non-obstante clause and a parliamentary enactment governing winding up (i.e., interplay of Entries in List I and List II of the Seventh Schedule and Article 246). ISSUE-WISE DETAILED ANALYSIS - Issue 1: Priority of State 'first charge' vis-à-vis Sections 529A and 530 of the Companies Act Legal framework: Section 47 of the State VAT Act declares tax and other sums payable 'to be the first charge' on the debtor's property and begins with a non-obstante clause. Sections 529A (overriding preferential payment) and 530 (preferential payments) of the Companies Act, 1956 provide a statutory order of priority in winding up: (a) workmen's dues and (b) certain secured creditors' debts pari passu, with Section 530 subject to Section 529A for payment of revenues/taxes. Precedent Treatment: Multiple High Courts and the Supreme Court have addressed analogous conflicts. Courts have held that after the 1985 amendment introducing Section 529A, Parliament intended to accord overriding preferential status to workmen and certain secured creditors; State 'first charge' provisions cannot displace Section 529A where irreconcilable conflict exists. Earlier decisions (e.g., pre-amendment or where central Acts did not create similar priority) have been distinguished. Decisions recognizing central enactments (post-amendment) as prevailing where conflict is irreconcilable were followed. Interpretation and reasoning: The Companies Act, as a parliamentary enactment under Entry 43 (List I), governs winding up priorities. Section 529A's non-obstante character and explicit scheme place workmen's dues and certain secured creditors ahead of 'all other debts.' Section 530 expressly makes tax/revenue payments subject to Section 529A. The State VAT provision, though having a non-obstante clause, is a law under the State List (Entry 54, List II) and cannot override a Union enactment on a matter falling within the Union's legislative competence where irreconcilable collision exists. Pith-and-substance and constitutional supremacy (Article 246) require that where conflict cannot be harmonized, the parliamentary statute prevails. Ratio vs. Obiter: Ratio - where Section 529A and Section 530 of the Companies Act conflict with a State law creating a first charge for tax dues in the context of company winding up, the Companies Act provisions prevail to the extent of irreconcilable inconsistency. Obiter - discussion on breadth of State competence and comparative status of 'special' vs 'general' laws, insofar as it reiterates constitutional principles, but supports the ratio. Conclusion: The State's statutory 'first charge' under the VAT Act cannot take precedence over priority accorded by Sections 529A/530 of the Companies Act in a winding up; tax claims are payable only after satisfying the priorities in Section 529A (subject to available assets). ISSUE-WISE DETAILED ANALYSIS - Issue 2: Obligation of the Official Liquidator to treat VAT claim as preferential/secured Legal framework: The Official Liquidator must adjudicate claims and distribute assets according to the Companies Act priority rules in a winding up. Section 529A prescribes overriding payment of workmen and specified secured creditors; Section 530 provides for preferential payments (including taxes) but 'subject to' Section 529A. Precedent Treatment: Judicial authorities (including High Courts cited) have uniformly held that once Section 529A applies, taxes and other State dues fall to be paid only after the Section 529A priorities are satisfied; the Official Liquidator is bound to follow this hierarchy. Cases where State first-charge provisions were allowed to prevail were examined and distinguished on constitutional/legislative-scope grounds or because central enactments did not create equivalent priority. Interpretation and reasoning: The Official Liquidator's communications and distributions must be consistent with statutory priorities; rejection of portions of a tax claim (e.g., penalties/interest accruing post-winding-up date) is permissible where not admissible under Companies/Insolvency law. Where funds are insufficient, the statutory scheme mandates abatement among Section 529A debts and precludes elevating State tax claims above the prioritized classes. The State's remedy is not to re-write Section 530 or to seek judicial alteration of the statutory order. Ratio vs. Obiter: Ratio - the Official Liquidator acted within mandate in treating the State's claim as falling under Section 530 and not as a superior first charge when Section 529A priorities applied; rejection of post-winding penalties/interest is legally tenable. Obiter - remarks on the State's legislative competence to create a first charge, which does not affect the practical priority established by the Companies Act. Conclusion: The Official Liquidator was not obliged to pay the State VAT claim ahead of workmen and qualifying secured creditors; the State's claim ranked under Section 530 and was subject to Section 529A priorities and to availability of funds. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Resolving conflicts between State 'special' law and Union 'general' law containing non-obstante clauses Legal framework: Article 246 and the Seventh Schedule delineate Union and State legislative competences; non-obstante clauses in statutes signal intended overriding effect but do not, by themselves, resolve constitutional repugnancy where pith and substance and legislative competence lead to irreconcilability. Precedent Treatment: Authorities applying pith-and-substance and earlier Supreme Court guidance were followed - where two statutes are irreconcilable, the parliamentary enactment prevails in matters within Union competence; later enactments and explicit priority-conferring amendments at the Union level (e.g., insertion of Section 529A) are significant in assessing conflict. Interpretation and reasoning: Non-obstante language in a State VAT Act cannot neutralize a central enactment that governs winding up priorities when the two cannot be harmonized. The correct exercise is to attempt harmonious construction; failing that, constitutional principles under Article 246 require giving precedence to the Union law. The legislative history (i.e., the 1985 amendment enacting Section 529A) demonstrates parliamentary intent to protect workmen and certain secured creditors' priority in winding up. Ratio vs. Obiter: Ratio - application of pith-and-substance and Article 246 principles leads to the conclusion that a State non-obstante provision cannot override a Union statutory priority in the context of company winding up where conflict is irreconcilable. Obiter - discussion of comparative labels 'special' vs 'general' law was explanatory and not dispositive. Conclusion: Conflicts between State non-obstante provisions creating first charge and Parliament's Companies Act priorities must be resolved in favour of the Companies Act where irreconcilable; harmonious construction is preferred but cannot rewrite Parliament's enacted priority scheme. OVERALL CONCLUSION AND DISPOSITION The Court concludes that the State's VAT 'first charge' does not supplant the preferential scheme of Sections 529A/530 of the Companies Act in winding up; the Official Liquidator acted within legal bounds in not giving the State's claim priority over workmen and qualifying secured creditors. The applications seeking priority and release of amounts to the State are dismissed.