2025 (5) TMI 2004 - AT - IBC

NCLAT rules government dues under GVAT Act Section 48 create statutory charge making government secured creditor under IBC Section 53

State Tax Officer Versus Premraj Ramratan Laddha & Ors.

NCLAT allowed appeal regarding categorization of government dues under GVAT Act and CST Act as secured creditor. Tribunal held that Section 48 of GVAT Act ... Categorisation of creditor - Operational Creditors or secured creditor - government dues accrued on the basis of assessment under the GVAT Act and CST Act pertaining to the year 2009-11 and 2014-16, before the date of CIRP and having been upheld in appeal, dismissed in the year 2019 - whether by virtue of the order passed under Section 48 of the GVAT Act a charge is created on the property of the CD by way of operation of law in view of the law laid down by the Hon’ble Supreme Court in the case of Rainbow Papers [2022 (9) TMI 317 - SUPREME COURT]? HELD THAT:- In the case of Rainbow Papers, the Hon’ble Supreme court has held that the CoC which might include financial institutions and other financial creditors cannot secure their own dues at the cost of statutory dues owed to any government or governmental authority or for that matter any other dues. In view of Section 48 of the GVAT Act a charge was created on the property of the CD by way of operation of law in favour of the Appellant as a result of which the Appellant is entitled to be treated as secured creditor under Section 53 of the code. The resolution plan is in violation of the statutory provisions and is directly hit by the judgement of the Hon’ble Supreme court rendered in the case of Rainbow papers as it is clearly a case of material irregularity, in terms of Section 30(2) of the Code. The matter is remanded back to the Adjudicating Authority to take further action in accordance with law - Appeal allowed - The parties are directed to appear before the Tribunal on 30th May, 2025. The core legal questions considered in this judgment are:1. Whether the dues of the State Tax Officer, arising under the Gujarat Value Added Tax (GVAT) Act, 2003 and the Central Sales Tax (CST) Act, which accrued prior to the commencement of the Corporate Insolvency Resolution Process (CIRP), constitute a secured debt by virtue of a charge created by operation of law under Section 48 of the GVAT Act.2. Whether the State Tax Officer should be classified as a secured creditor or an operational creditor under the Insolvency and Bankruptcy Code, 2016 (IBC), and the implications of such classification on the distribution of proceeds under the approved resolution plan.3. The effect of the Supreme Court's decision in the case of State Tax Officer vs. Rainbow Papers Limited on the classification of government dues as secured debts and the consequent impact on the approval and implementation of resolution plans under the IBC.4. The scope of judicial review over the Committee of Creditors' (CoC) decision approving the resolution plan, especially when statutory dues are proposed to be paid nil or at a lower priority.5. The legal consequences of delayed filing of claims by the State Tax Officer and whether such delay justifies exclusion from secured creditor status or payment under the resolution plan.Issue-wise Detailed Analysis1. Classification of Government Dues as Secured Debt under Section 48 of the GVAT ActThe relevant legal framework includes Section 48 of the GVAT Act, which provides that any amount payable by a dealer on account of tax, interest, or penalty shall be a first charge on the property of the dealer by operation of law. The IBC defines a secured creditor under Section 3(30) as a creditor in favour of whom security interest is created, which may include security created by operation of law.The Supreme Court in Rainbow Papers clarified that Section 48 of the GVAT Act creates a statutory charge on the property of the debtor in favour of the State, thus qualifying the State as a secured creditor under the IBC. The Court emphasized that Section 53 of the IBC, which governs the distribution of liquidation proceeds, does not override Section 48 of the GVAT Act, and the two provisions are not inconsistent.The present case involves admitted dues amounting to Rs. 11,70,47,801/- relating to assessment years 2009-11 and 2014-16, upheld on appeal before the Gujarat Value Added Tax Tribunal. The State Tax Officer claimed a charge on the corporate debtor's property by operation of law under Section 48 of the GVAT Act, asserting secured creditor status.The respondents contended that statutory dues are operational debts unless backed by a registered charge, which was not the case here. They relied on a recent Supreme Court decision in Paschimanchal Vidyut Vitran Nigam Ltd. that government dues do not enjoy priority over secured creditors absent valid security interest. However, this was distinguished on the ground that the Rainbow Papers decision remains binding and authoritative.The Court found that the statutory charge under Section 48 of the GVAT Act was created by operation of law and that the State Tax Officer is entitled to be treated as a secured creditor under Section 53 of the IBC.2. Impact of Supreme Court's Rainbow Papers Decision on Resolution Plan ApprovalThe Supreme Court in Rainbow Papers set aside a resolution plan that failed to provide for statutory dues payable to the State, holding that the State's dues must be treated as secured debts and cannot be waived or ignored in the resolution process. The Court emphasized that if a resolution plan ignores statutory demands, the Adjudicating Authority must reject it.The present appeal challenges the impugned order approving a resolution plan that admitted the State Tax Officer's claim but allocated no payment to it, categorizing it as an operational creditor. The Court noted that the resolution plan distributed Rs. 4,00,05,000/- against admitted claims exceeding Rs. 37 crores, with secured financial creditors receiving partial payments and operational creditors, including government dues, receiving none.The Court held that such a plan violates statutory provisions and the Supreme Court's precedent in Rainbow Papers, amounting to a material irregularity under Section 30(2) of the IBC. The plan's failure to pay the State Tax Officer, a secured creditor by operation of law, rendered the plan non-compliant with the legal framework.3. Classification of the State Tax Officer as Operational Creditor and Effect of Delayed Claim FilingThe respondents argued that the State Tax Officer filed its claim belatedly as an operational creditor on Form B, 156 days after the last date for submission, and thus waived any secured creditor status. They contended that the CoC's approval of the plan should be respected, and judicial interference should be minimal.However, the Court observed that delay in filing a claim cannot be the sole ground to deny the statutory secured creditor status, especially when the charge arises by operation of law. The Supreme Court in Rainbow Papers rejected the notion that the government's secured creditor status could be negated due to procedural delays. The Court also emphasized that the CoC's wisdom, while paramount, cannot override statutory mandates or lead to approval of plans in violation of law.4. Scope of Judicial Review over CoC's Decision and Resolution PlanThe respondents relied on precedents affirming the primacy of the CoC's commercial wisdom and the limited scope of judicial review under Sections 30(2) and 61 of the IBC. They cited decisions affirming that courts should not interfere with the CoC-approved resolution plan unless there is a material irregularity or non-compliance with law.The Court agreed that judicial review is limited but emphasized that material irregularities, such as ignoring statutory secured creditors, justify interference. The failure to treat the State Tax Officer as a secured creditor and to provide for its dues in the resolution plan constituted such a material irregularity justifying setting aside the impugned order and remanding the matter for reconsideration.5. Effect of Non-registration of Charge and Overriding Effect of IBCThe respondents contended that the alleged charge under Section 48 of the GVAT Act was not registered with the Registrar of Companies or land revenue authorities, and thus no valid security interest was created. They also argued that the IBC's overriding effect under Section 238 negates any conflicting laws.The Court, relying on the Supreme Court's authoritative interpretation in Rainbow Papers, held that the statutory charge created by operation of law under Section 48 of the GVAT Act does not require registration to qualify as a security interest under the IBC. The definition of secured creditor under the IBC includes security interest created by operation of law, which encompasses the statutory charge. Therefore, the IBC does not override but coexists with the statutory charge provisions.Conclusions on IssuesThe Court concluded that the State Tax Officer's dues under the GVAT and CST Acts created a charge by operation of law on the corporate debtor's property and thus the State Tax Officer is a secured creditor under the IBC. The resolution plan approved without providing for the State Tax Officer's dues as a secured creditor violated statutory provisions and Supreme Court precedent, amounting to a material irregularity warranting interference.The delayed filing of the claim as an operational creditor did not negate the statutory secured creditor status. The CoC's approval of the plan did not preclude judicial review where the plan contravened mandatory legal provisions.Significant Holdings'Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman's dues for a period of 24 months preceding the liquidation commencement date.''The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.''If a Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.''Delay in filing a claim cannot be the sole ground for rejecting the claim.''The Resolution Professional may consider a fresh Resolution Plan in the light of the observations made above. However, this judgment and order will not prevent the Resolution Applicant from submitting a plan in the light of the observations made above, making provisions for the dues of the statutory creditors like the appellant.'The Court set aside the impugned order approving the resolution plan and remanded the matter to the Adjudicating Authority for further action in accordance with law, directing that the State Tax Officer's dues be treated as secured debts and appropriately provided for in any fresh resolution plan.