Liquidation waterfall prevails over state tax charge; statutory charge did not create secured creditor status under insolvency law.

The article examines whether a state tax department can claim secured creditor status in liquidation on the basis of a statutory charge under the Haryana Value Added Tax Act, 2003, and whether liquidation proceeds must follow the Insolvency and Bankruptcy Code, 2016 waterfall. It explains that the statutory charge did not amount to a security interest within Section 52 read with Section 53(1)(b)(ii) of the Code, that Rainbow Papers was factually and legally distinguishable, and that Section 238 gives the Code overriding effect over conflicting state law. The indemnity-based distribution proposal was rejected as inconsistent with the Code's priority scheme.

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Issues: Whether the Excise and Taxation Department could be treated as a secured creditor in liquidation on the basis of a statutory charge under the Haryana Value Added Tax Act, 2003, and whether the liquidation sale proceeds had to be distributed in accordance with the Insolvency and Bankruptcy Code, 2016.

Analysis: The dispute turned on the interaction between the liquidation waterfall under the Insolvency and Bankruptcy Code, 2016 and the statutory charge claimed under the Haryana Value Added Tax Act, 2003. The Court held that the facts and legal setting considered in Rainbow Papers were not applicable to the present liquidation, and that the tax department did not possess security interest within the meaning of Section 52 read with Section 53(1)(b)(ii) of the Insolvency and Bankruptcy Code, 2016. It further held that Section 238 of the Insolvency and Bankruptcy Code, 2016 gives the Code overriding effect, so Section 26 of the Haryana Value Added Tax Act, 2003 could not displace the distribution scheme under the Code. The proposed indemnity-based arrangement was rejected as contrary to the settled legal position.

Conclusion: The Excise and Taxation Department was not entitled to be treated as a secured creditor for distribution in liquidation, and the sale proceeds had to be distributed to the secured financial creditor in accordance with the Insolvency and Bankruptcy Code, 2016.

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