Statutory first charge and liquidation distribution: VAT dues secured, CST dues unsecured, with relinquishment under insolvency law.

A statutory first charge created by operation of law under the Gujarat VAT Act can amount to a security interest in liquidation, so VAT dues were treated as secured, while CST dues were not because the Central Sales Tax Act did not create an equivalent first charge. Proof of that statutory charge did not depend on registration under the Companies Act or disclosure in the claim form where the liquidator had notice of the legal basis of the claim. A secured creditor that does not elect to realise the security under the Insolvency and Bankruptcy Code is treated as having relinquished it for distribution, and may share in the liquidation waterfall for the secured component.

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Issues: (i) Whether the appellant was entitled to be treated as a secured creditor for its VAT dues and CST dues; (ii) whether the statutory charge created by section 48 of the Gujarat Value Added Tax Act, 2003 had to be proved through registration or disclosure in the claim form for recognition in liquidation; (iii) whether the appellant, by not exercising the option under section 52(1)(b) of the Insolvency and Bankruptcy Code, 2016, was to be treated as having relinquished its security interest and therefore entitled to distribution under section 53.

Issue (i): Whether the appellant was entitled to be treated as a secured creditor for its VAT dues and CST dues.

Analysis: The appellant's VAT dues were backed by a statutory first charge under section 48 of the Gujarat Value Added Tax Act, 2003, which attached by operation of law on assessment. That charge made the appellant a secured creditor in respect of the VAT component. The CST component stood on a different footing, because the Central Sales Tax Act, 1956 did not itself create an equivalent first charge, and section 9(2) of that Act could not be used to import the Gujarat statute's charge so as to elevate CST dues to secured status. Governmental dues may enjoy priority as crown debt, but not over prior secured debt in the manner claimed here.

Conclusion: The appellant was a secured creditor for VAT dues only, and not for CST dues.

Issue (ii): Whether the statutory charge created by section 48 of the Gujarat Value Added Tax Act, 2003 had to be proved through registration or disclosure in the claim form for recognition in liquidation.

Analysis: Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016 permits proof of security interest by several modes, but it does not confine proof of a statutory charge to registration under section 77(3) of the Companies Act, 2013. A charge created by operation of law is different from a contractual charge created by the company. The statutory charge under section 48 arose on assessment itself and did not depend on registration with the Registrar of Companies or CERSAI. Non-disclosure of particulars in the claim form did not by itself destroy the charge where the liquidator had contemporaneous notice of the statutory basis of the claim.

Conclusion: Registration under section 77(3) of the Companies Act, 2013 was not indispensable for the appellant's statutory VAT charge, and the omission in the claim form did not defeat the claim.

Issue (iii): Whether the appellant, by not exercising the option under section 52(1)(b) of the Insolvency and Bankruptcy Code, 2016, was to be treated as having relinquished its security interest and therefore entitled to distribution under section 53.

Analysis: A secured creditor who does not opt to realise the security interest in liquidation is treated as having relinquished that security for purposes of the liquidation distribution scheme. The appellant had asserted its secured status but did not elect to realise the security interest under section 52(1)(b). Accordingly, for the VAT component it fell within the class of secured creditors who share in distribution under section 53(1)(b)(ii). The liquidation distribution already made required adjustment to the extent necessary to recognise the appellant's VAT-secured position.

Conclusion: The appellant was to be treated as having relinquished the security interest for liquidation distribution purposes and was entitled to share in the waterfall under section 53 for its VAT dues.

Final Conclusion: The appellant succeeded only in part: its VAT dues had secured status and were to be accounted for in liquidation distribution, while its CST dues remained unsecured operational government dues.

Ratio Decidendi: A statutory first charge created by operation of law may constitute security interest in liquidation without contractual registration, but it confers secured status only to the extent the underlying statute creates that charge, and a secured creditor who does not exercise the realisation option in liquidation is relegated to the distribution waterfall under the Code.

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