Statutory tax dues as first charge: resolution plan ignoring government dues was held inconsistent with the Insolvency and Bankruptcy Code.
State tax dues under section 48 of the Gujarat Value Added Tax Act, 2003 were treated as a first charge on the dealer's property, so the State qualified as a secured creditor for purposes of the Insolvency and Bankruptcy Code, 2016; the earlier Supreme Court ruling in Rainbow Papers was followed, and the contrary line of argument was rejected. A resolution plan that made no provision for admitted statutory dues was held inconsistent with the Code, because commercial wisdom cannot validate a plan that is ex facie contrary to the statutory framework. The plan's treatment of the claim as nil was a material irregularity, and the approval was set aside.
Issues: (i) Whether the State tax dues under section 48 of the Gujarat Value Added Tax Act, 2003 created a charge by operation of law so that the State had to be treated as a secured creditor under the Insolvency and Bankruptcy Code, 2016; (ii) Whether a resolution plan that made no provision for such statutory dues could be sustained.
Issue (i): Whether the State tax dues under section 48 of the Gujarat Value Added Tax Act, 2003 created a charge by operation of law so that the State had to be treated as a secured creditor under the Insolvency and Bankruptcy Code, 2016.
Analysis: Section 48 of the Gujarat Value Added Tax Act, 2003 provides that tax dues are a first charge on the property of the dealer. The reasoning followed the principle that a security interest may arise by operation of law and that the definition of secured creditor under the Insolvency and Bankruptcy Code, 2016 does not exclude governmental authorities. The earlier Supreme Court ruling in Rainbow Papers was treated as controlling, and the contrary argument based on later decisions was rejected as not displacing that binding position.
Conclusion: Yes. The State was to be treated as a secured creditor in respect of the admitted tax dues.
Issue (ii): Whether a resolution plan that made no provision for such statutory dues could be sustained.
Analysis: A resolution plan that ignores statutory dues payable to a government authority is not in conformity with the Insolvency and Bankruptcy Code, 2016. The Court held that the Committee of Creditors' commercial wisdom could not validate a plan that was ex facie contrary to the statutory framework, and that the admitted claim having been treated as nil in the plan amounted to a material irregularity.
Conclusion: No. The resolution plan could not be sustained and the impugned approval was liable to be set aside.
Final Conclusion: The appeal succeeded, the approval of the resolution plan was annulled, and the matter was sent back for further consideration in accordance with law.
Ratio Decidendi: Statutory tax dues that create a first charge by operation of law constitute a security interest for purposes of the Insolvency and Bankruptcy Code, 2016, and a resolution plan that wholly ignores such dues is not legally sustainable.
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