IBC waterfall prevails over State VAT charge in liquidation; tax department cannot claim secured-creditor status for distribution.

In liquidation under the Insolvency and Bankruptcy Code, a State VAT charge did not by itself confer secured-creditor status or displace the Code's waterfall mechanism. The Tribunal held that the State tax department could not rank with secured financial creditors merely because local VAT law created a first charge, since Section 238 gives the Code overriding effect over inconsistent laws. The liquidation proceeds therefore had to be distributed under Section 53 in favour of the secured financial creditor that had relinquished its security interest, and the withheld sale proceeds could not be diverted to the State claim.

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Issues: Whether, in liquidation under the Insolvency and Bankruptcy Code, 2016, statutory VAT dues claimed by the State could be treated as secured debt on the basis of a first charge under the State VAT law so as to rank with secured financial creditors, and whether the liquidation proceeds had to be distributed in accordance with the Code's waterfall mechanism in favour of the secured financial creditor that had relinquished its security interest.

Analysis: The appeal arose from a dispute over distribution of liquidation sale proceeds. The decisive question was whether the Excise and Taxation Department could be placed on par with secured creditors merely because the State VAT statute created a charge on the defaulter's property. The Tribunal held that the earlier decision relied upon by the liquidator did not govern the present stage of proceedings, since the corporate debtor had already entered liquidation and the priorities had to be worked out under the Insolvency and Bankruptcy Code. It further held that the State VAT charge could not override the Code because Section 238 gives the Code overriding effect over inconsistent laws. On that basis, the State department could not be treated as a secured financial creditor for liquidation distribution, and the withheld sale proceeds had no basis to be diverted away from the appellant secured creditor.

Conclusion: The claim of the State tax department was not entitled to priority as a secured creditor in liquidation, and the liquidator was directed to distribute the entire sale proceeds in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016 in favour of the secured financial creditor that had relinquished its security interest.

Ratio Decidendi: In liquidation under the Insolvency and Bankruptcy Code, a State tax charge created by local VAT law does not by itself displace the Code's waterfall mechanism or confer secured-creditor status for distribution of liquidation proceeds where the Code contains an overriding provision.

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