2025 (8) TMI 1075 - HC - IBC

Initiation of CIRP triggers moratorium, IRP/RP appointment and announcement; liquidation follows under Section 33; Sections 52-53 protect secured creditors' rights

M/s. Avenue Realty (A Partnership Firm) represented by its Managing Partner Mr. T.M. Elayaraja Versus The Assistant Commissioner Srirangam (GST Circle), The Sub Registrar, RLS Alloys Private Limited (Under Liquidation)

M/s. Avenue Realty (A Partnership Firm) represented by its Managing Partner Mr. T.M. Elayaraja Versus The Assistant Commissioner Srirangam (GST Circle), ... ISSUES PRESENTED AND CONSIDERED 1. Whether a tax department that has earlier attached assets of a corporate debtor under a tax statute constitutes a 'secured creditor' within the meaning of the Insolvency and Bankruptcy Code (IBC) and thereby possesses independent enforcement rights in liquidation proceedings. 2. Whether failure of a secured creditor (tax authority) to file a claim within the deadlines/public announcement under the IBC or at stages prior to liquidation defeats or extinguishes its proprietary/secured rights in the liquidation process. 3. Whether a liquidator/IRP/RP can proceed with auction and distribution of sale proceeds without either (a) obtaining the secured creditor's election under Section 52 (relinquish security to estate or realise security), or (b) ensuring appropriate treatment of pre-existing statutory attachments/encumbrances. 4. Whether attachment of assets by a tax authority prior to CIRP/liquidation takes precedence or is otherwise displaced by the IBC waterfall mechanism and the statutory scheme governing liquidation under the IBC. 5. Relief question: Whether a sale certificate issued pursuant to liquidation auction can be registered where a secured creditor's pre-existing attachment/rights have not been appropriately accounted for, and what remedies are available to a purchaser who paid sale price. ISSUE-WISE DETAILED ANALYSIS Issue 1: Status of Tax Department as 'Secured Creditor' under IBC Legal framework: Definitions of 'secured creditor' (Section 3(30)) and 'security interest' (Section 3(31)) of the IBC; statutory charge provisions in tax statutes (e.g., provision creating charge recoverable as arrear of land revenue). Precedent treatment: The Court relied on and treated Rainbow Papers (affirmed by later Supreme Court dicta) and other Supreme Court authorities which recognize that statutory charges created by tax statutes can constitute 'security interest' and that tax departments can be 'secured creditors' under IBC. Interpretation and reasoning: A charge created by a tax assessment and statutory provision making unpaid tax a charge on property amounts to a security interest under Section 3(31). Therefore the tax department in such circumstances is a secured creditor per Section 3(30); this places it in a different class with independent rights to enforce security in liquidation. Ratio vs. Obiter: Ratio - statutory charge under tax law that amounts to an encumbrance qualifies the tax authority as a secured creditor within the IBC. Conclusion: The tax department with an assessment and attachment is a secured creditor under the IBC. Issue 2: Effect of Delay/Failure to File Claim on Secured Creditor's Rights Legal framework: Sections 15 (public announcement and last date for submission of claims), 29 (information memorandum), 52 (rights of secured creditor in liquidation), 53 (waterfall mechanism); Regulations and duties of IRP/RP to collate claims. Precedent treatment: Cited Supreme Court decisions (including Ghanashyam Mishra, Embassy Property, RPS Infrastructure, Rainbow Papers, Paschimanchal and Sanjay Kumar Agarwal) addressing interplay between IBC claim procedures, secured creditor rights, and finality of claims/resolution. Interpretation and reasoning: The IBC distinguishes secured creditors from other creditors. While public announcement and claim submission processes are essential for collating claims for CIRP and information memorandum, the failure of a secured creditor to file a claim within those timeframes does not, ipso facto, extinguish its pre-existing secured rights. Section 52 grants independent enforcement routes to secured creditors (relinquish security to estate or realise security themselves), with procedural safeguards (notice to liquidator, verification). Authorities restricting reopening of claim windows for ordinary creditors do not negate Section 52 rights. Ratio vs. Obiter: Ratio - Secured creditor's right to realise security under Section 52 survives even if claim was not filed in response to public announcement; delay/failure to file is not fatal to enforcement of a validated security interest. Conclusion: Delay in filing a claim does not defeat a secured creditor's independent rights to realise its security under Section 52; the liquidator/IRP/RP must recognise and facilitate those rights. Issue 3: Duties of IRP/RP/Liquidator when Pre-existing Attachments Exist Legal framework: Duties of IRP under Sections 18, 21, Section 29 (information memorandum), Regulation 36 and 47 (liquidation timelines), Section 52 (secured creditor options), Section 53 (distribution), and NCLT orders concerning moratorium and liquidation. Precedent treatment: Authorities emphasise RP's duty to prepare information memorandum and disclose material litigation, guarantees and encumbrances so that prospective resolution applicants are aware of liabilities; failure to note pre-existing charges undermines the process. Interpretation and reasoning: The IRP/RP/liquidator is obliged to collect and disclose information relating to assets, liabilities and pre-existing charges (to preserve value and ensure informed bidding). Where a secured creditor has a valid attachment, the liquidator must either invite the secured creditor to elect under Section 52 or assist in realisation, and cannot proceed to auction and distribute proceeds in a manner that prejudices the secured creditor's independent rights. Rejecting a secured creditor's claim without providing for its statutory enforcement remedies constitutes error. Ratio vs. Obiter: Ratio - Liquidator must take cognizance of pre-existing attachments and secure adherence to Section 52/53 mechanics; failure to do so is a legal error. Conclusion: The liquidator/IRP/RP should have informed/required the secured creditor to elect between relinquishment or realisation and must verify and account for security interests before auction/distribution. Issue 4: Priority of Tax Attachment vis-à-vis IBC Waterfall and Effect on Auction/Sale Certificate Registration Legal framework: Section 53 (waterfall) ranking of claims, Section 52 (secured creditor options), statutory charge provisions; interplay of special statute (IBC) via Section 238 (non-obstante) and tax statutes. Precedent treatment: The Court surveyed Supreme Court authorities showing nuanced positions: some decisions recognizing tax department as secured creditor (Rainbow Papers), others critiquing or contextualising such rulings (Paschimanchal), and later clarifying affirmations (Sanjay Kumar Agarwal). The Court treated these authorities as guiding that secured creditor rights under IBC must be respected while applying waterfall in liquidation. Interpretation and reasoning: The IBC's waterfall prescribes distribution order, but Section 52 preserves a secured creditor's option to enforce security outside the waterfall (or relinquish to estate and join waterfall). A statutory attachment creates enforceable security; thus auction and distribution without accounting for this runs counter to Sections 52 and 53. Registration of sale certificate is impermissible where secured creditor's rights remain unsatisfied and were not accommodated; purchaser's remedy lies as against parties who received distribution in breach of secured creditor's rights. Ratio vs. Obiter: Ratio - Pre-existing statutory attachment vests enforceable secured rights that must be accommodated under Sections 52/53; auction proceeds cannot be distributed in breach of those rights and sale registration cannot be permitted where such rights are compromised. Conclusion: The attachment's priority must be respected through Section 52 mechanisms; registration of sale certificate cannot be allowed while secured creditor's rights remain unaddressed, and the purchaser's remedy is to recover monies paid from persons who received proceeds improperly. Issue 5: Remedies and Relief - Consequences of Liquidator's Error and Available Remedies to Purchaser and Secured Creditor Legal framework: Section 52 (realisation/relinquishment, surplus accounting), Section 53 (distribution), powers of adjudicating authority, ancillary remedies under IBC and civil law to recover sums paid in breach of statutory process. Precedent treatment: Authorities requiring finality of CIRP/resolution and cautioning against reopening claims for ordinary creditors were distinguished as not affecting secured creditor statutory rights; courts have also provided for orders to protect secured creditor rights and restitution where distribution is contrary to law. Interpretation and reasoning: Where liquidator ignored secured creditor rights and proceeded with sale/distribution, the secured creditor retains entitlement to enforcement (including application to adjudicating authority under Section 52(5)-(6)). A purchaser who paid sale consideration but whose registration is blocked by attachment has a contractual-equitable remedy to recover sums from those who received distributions contrary to law; liquidator must assist recovery and apply any recovered sums to satisfy secured creditor, after which attachment would be lifted. Ratio vs. Obiter: Ratio - The purchaser's remedy is monetary recovery from recipients of improperly distributed proceeds; the liquidator has a duty to assist recovery and to ensure secured creditor satisfaction before enabling registration. Conclusion: Where liquidator erred, the writ challenge was dismissed, but the Court directed that the purchaser must seek recovery from recipients of proceeds and the liquidator must assist; once secured creditor is paid, attachment to be vacated and registration may proceed. Overall Conclusion The Court held that a tax authority with an assessment and attachment is a secured creditor under the IBC; its rights under Sections 52 and 53 survive non-filing of claims within CIRP timelines; the IRP/RP/liquidator erred in ignoring such secured rights and in proceeding with sale and distribution without addressing the secured creditor's options; registration of sale certificate cannot be countenanced until secured creditor's rights are satisfied; purchaser's remedy is to recover amounts from those who received proceeds in breach, with liquidator's assistance, and upon complete payment to the secured creditor the attachment shall be lifted.