2025 (11) TMI 961 - AT - IBC

Pre-CIRP tax attachment creates statutory charge under Section 48 GVAT Act, giving State secured creditor status under IBC

The Cosmos Co. OP. Bank Ltd. Versus Mr. Kailash T. Shah, Naresh Tradelink Private Limited and Gujarat State Tax Department, Sabarkantha

NCLAT affirmed that a pre-CIRP attachment by a State tax authority created a statutory charge under Section 48 of the GVAT Act, giving the State a secured ... CIRP - Status of tax Dues - Attachment of property by tax department prior to proceeding under IBC - Secured Creditor not - Jurisdiction to direct distribution of funds reserved post-approval of a Resolution Plan to a State tax authority - retention and subsequent distribution of the amount earmarked for the financial creditor in the Resolution Plan to the State Tax Department after the approval of resolution plan is in accordance with the provisions of the Code and judicial precedents or not - Doctrine of finality - HELD THAT:- The Respondent No.3 had stated in the reply filed before the Adjudicating Authority that the claim of the State Tax Department would be the first charge on the property of the CD by operation of law in terms of Section 48 of Gujarat VAT Act read with sections 3(4), 3(30) and 3(31) of the Code and the Department would be a secured creditor as per sections 53(1)(b)(ii) and not one under section 53 (1)(e) of the Code. Department had further cited the decision of SANJAY KUMAR AGARWAL [2020 (3) TMI 1045 - GUJARAT HIGH COURT] vide which the Hon’ble HC stayed the operation of order passed by NCLT, Mumbai Bench which had ordered the removal of attachment of property by the Gujarat Tax Deptt. in similar matter. The Respondent No.3 further prayed that they be treated as secured operational creditor and their claim should be decided accordingly. It is already noted that even before the CIRP began, the State Tax Department had already attached the Corporate Debtor’s property. This attachment created a valid security interest in favour of the State. The Hon’ble Gujarat High Court in ‘Shree Radhekrushna Ginning and Pressing Pvt. Ltd. v. State of Gujarat [2022 (4) TMI 198 - GUJARAT HIGH COURT] held that once such an assessment is made and attachment is affected, a charge over the immovable property comes into existence by operation of Section 48. In this case as the assessment orders become absolute much prior to initiation of CIRP and the attachment was already enforced, therefore, by the time the CIRP began, the State already had a secured right over the property of the CD. It is well-settled that a declaration of law by the Supreme Court applies retrospectively, unless the Court expressly restricts it to the future. In this case Hon’ble Supreme Court interpreted the Section 48 of GVAT Act, 2003 in the light of provisions of IBC Code and found no conflict therein. In such a situation the treatment of Gujarat Tax Deptt. as secured creditor would be effective from the date of coming into effect of IBC. There are no infirmity in the impugned order. The appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority/Tribunal had jurisdiction to direct distribution of funds reserved post-approval of a Resolution Plan to a State tax authority by treating it as a secured creditor, thereby affecting the amounts earmarked under the approved Plan. 2. Whether a statutory charge created under Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT Act) constitutes a 'security interest' within the meaning of Sections 3(31) and 3(30) of the Insolvency and Bankruptcy Code, 2016 (IBC), thereby classifying the State tax authority as a secured creditor for purposes of distribution under Section 53 of the IBC. 3. Whether a creditor's failure to challenge classification under a Resolution Plan or failure to appeal an order approving the Plan amounts to waiver or estoppel that precludes subsequent assertion of secured status when such status is the subject-matter of a pending application before the Adjudicating Authority. 4. Whether a declaration of law by the Supreme Court (as in Rainbow Papers) applies retrospectively to pending proceedings and can be applied by the Adjudicating Authority to a matter in which the Plan had been approved before the pronouncement. 5. Whether the Resolution Professional became functus officio upon approval of the Resolution Plan so as to preclude reservation and distribution of disputed amounts pending adjudication, and whether the Adjudicating Authority's direction to disburse reserved funds amounted to impermissible modification of an approved Plan. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction to direct distribution post-approval of Resolution Plan Legal framework: Section 31(1) IBC (approval binding on stakeholders), Section 30(2) IBC (requirements of plan), supervisory powers of Adjudicating Authority over implementation, and Section 53 IBC (waterfall on liquidation). Precedent treatment: The Court followed the principle that Adjudicating Authority cannot modify commercial terms of an approved plan, but retains jurisdiction to ensure implementation and to decide pending or reserved issues in light of binding law. Interpretation and reasoning: The Adjudicating Authority did not alter the commercial structure of the Plan; it ordered distribution of an amount that had been kept separate by the RP pending adjudication of the State's secured status. The order resolved a pending question rather than reopening or re-writing the Plan. The Tribunal emphasized the distinction between impermissible modification of an approved Plan and legitimate implementation/clarification to give effect to binding judicial precedent. Ratio vs. Obiter: Ratio - Adjudicating Authority can direct distribution of funds reserved for a disputed claim where the question as to the claim's nature is pending before it and is subsequently decided in conformity with binding precedent; this is implementation, not modification. Obiter - general comments on limits of supervisory powers of the Adjudicating Authority. Conclusion: The Adjudicating Authority acted within jurisdiction in directing distribution of the reserved amount; the direction did not impermissibly modify the approved Resolution Plan. Issue 2 - Statutory charge under Section 48 GVAT as 'security interest' under IBC Legal framework: Section 48 GVAT (first charge on property), Sections 3(4), 3(30), 3(31) IBC (definitions of charge, secured creditor, security interest), Section 53 IBC (order of distribution), and Section 238 IBC (non obstante clause of Code vis-à-vis other laws). Precedent treatment: The Tribunal followed the legal position declared by the Supreme Court in Rainbow Papers, which held that Section 48 GVAT creates a security interest by operation of law and that the State qualifies as a secured creditor under the IBC; it noted subsequent review affirmation. Interpretation and reasoning: Section 48 by its terms creates a first charge on the dealer's property 'notwithstanding anything contained in any other law,' and the creation of such a charge by operation of law falls within the IBC definition of 'security interest.' There is no inconsistency between a statutory first charge and the IBC waterfall where the statutory charge is recognised as a security interest under the IBC definitions; Section 238 does not oust Section 48 where there is no real conflict. Ratio vs. Obiter: Ratio - A statutory charge under Section 48 GVAT constitutes a 'security interest' under Section 3(31) IBC and consequently the State is a secured creditor whose dues rank for distribution in accordance with Section 53. Obiter - observations on co-existence of Section 48 GVAT and Sections 53/238 IBC in general terms. Conclusion: The statutory charge under Section 48 GVAT is a security interest under the IBC; the State Tax Department's claim qualified as secured and merited distribution from the reserved funds accordingly. Issue 3 - Failure to challenge Plan and effect on later assertion of secured status Legal framework: Section 31(1) IBC (binding nature of approved Plan), principles of finality and res judicata, jurisprudence on reopening final orders (Tilokchand, Neelima referenced in submissions). Precedent treatment: The Tribunal distinguished authorities affirming finality of orders where issues had been finally adjudicated, and applied the principle that a pending matter before the Adjudicating Authority awaiting decision does not make appeals against the Plan necessary or required. Interpretation and reasoning: Where the classification/secured-status issue was the subject of a pending interlocutory application before the Adjudicating Authority at the time of Plan approval, non-appeal against the Plan was not acquiescence. The State's rights arising from a statutory charge and the pendency of IA meant that instituting an appeal against approval prior to adjudication of the charge would have been premature; hence failure to challenge the Plan did not bar the State from asserting its secured claim once the law was declared. Ratio vs. Obiter: Ratio - Non-challenge to a Plan is not an estoppel where the creditor's claim as a secured creditor was sub judice before the Adjudicating Authority at the time of Plan approval. Obiter - remarks on doctrine of finality applicable only where issues are finally adjudicated. Conclusion: The State's failure to challenge the Plan did not preclude it from obtaining secured classification when the entitlement was pending adjudication; the State's claim could be considered notwithstanding non-appeal against plan approval. Issue 4 - Retrospective application of Supreme Court declaration (Rainbow Papers) Legal framework: Principle that Supreme Court declarations of law apply retrospectively unless expressly restricted; binding precedential effect on subordinate fora. Precedent treatment: The Tribunal applied the Rainbow Papers decision retrospectively to the pending IA and to distribution of the reserved amount, noting the Apex Court's subsequent review/affirmation. Interpretation and reasoning: Rainbow Papers interpreted statutory provisions to classify certain tax dues as security interests; because the Supreme Court's declaration clarifies pre-existing law, it applied retrospectively to pending matters. The Adjudicating Authority was obliged to apply the Supreme Court's law to the facts before it even though the Plan had been approved earlier. Ratio vs. Obiter: Ratio - A Supreme Court declaration of law applies retrospectively to pending proceedings and must be applied by the Adjudicating Authority when adjudicating a pending interlocutory application concerning classification of claims. Obiter - reference to circumstances where prospective application might be warranted (not required here). Conclusion: Rainbow Papers operated retrospectively; the Adjudicating Authority correctly applied it to the pending IA and directed distribution accordingly. Issue 5 - Functus officio of Resolution Professional and effect of reserved funds Legal framework: Duties and role of Resolution Professional during CIRP and after Plan approval (including implementation/monitoring), relevant IBBI regulations, Section 30(6) IBC and supervisory role of Adjudicating Authority. Precedent treatment: The Tribunal rejected a rigid view that RP becomes completely functus officio on plan approval where implementation steps or pending adjudications remain; it recognised RP's obligation to reserve amounts and act under CoC/AA directions until completion. Interpretation and reasoning: RP kept the disputed amount separate pending adjudication; the Adjudicating Authority's subsequent direction to distribute those reserved funds in light of binding law did not improperly expand RP's powers nor did it constitute reopening the Plan. The RP's reservation of funds and compliance with AA directions were consistent with duties to ensure proper implementation and to act under judicial supervision. Ratio vs. Obiter: Ratio - RP's duties and the AA's supervisory jurisdiction permit reservation and later distribution of disputed amounts where adjudication was pending; RP is not rendered incapable of acting on judicial directions post-approval for purposes of implementation. Obiter - observations on limits of RP's role when Plan implementation is complete. Conclusion: RP's reservation of funds and compliance with the Adjudicating Authority's direction to disburse to the State were lawful; the action did not amount to improper reopening of the Resolution Plan. Final Disposition (as per Court's operative conclusion) The impugned order directing distribution of Rs. 1.31 crores to the State tax authority as a secured creditor was upheld. The Tribunal found no infirmity in the Adjudicating Authority's decision to apply the Supreme Court's declaration in Rainbow Papers to the pending application and to direct distribution of the reserved amount; the appeal was dismissed.