TaxTMI 
TaxTMI 
2026 (5) TMI 765
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....nt contends that it should have been treated as a secured creditor in the distribution process under Sec. 53 of the Code. Facts 2. The material facts are: a) The appellant is the Sales Tax Authority of the State of Gujarat and the CD, M/s. Shree Raghuvanshi Fibres Pvt. Ltd., fell in arrears of VAT under the Gujarat Value Added Tax Act, 2003 (henceforth GVAT Act) and also CST for four assessment years from 2014-2015 to 2017-2018. According to the appellant a statutory first charge is created in terms of Sec. 48 of the GVAT Act. On 05.09.2019, the appellant initiated recovery steps and addressed a communication dated 05.09.2019 to the jurisdictional Mamlatdar seeking attachment and for recording of charge over the immovable properties of the Corporate Debtor. (However, Mamlatdar's records do not disclose any such charge or attachment of the asset of the CD) b) On 18.02.2020, the Corporate Debtor, came to be admitted to CIRP. On 07.07.2021, the appellant preferred its Claim vide Form B for Rs.. 36,87,64,745 for the aforesaid four assessment years. Out of this amount VAT component of the tax arrears constituted Rs.. 17,94,45,532 plus interest thereon at 18% p.a.....
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....M/s. Rama Agri Enterprise LLP emerged as the successful bidder for a consideration of Rs.. 9.45 crore. h) While so, on 21.04.2023, the Stakeholders' Consultation Committee meeting was held, in which the liquidator indicated that a legal opinion had been obtained on the treatment of statutory dues. The 3rd respondent Bank of Baroda, had expressed an idea that in the event of any subsequent legal development as regards the appellant's claim to be treated as a secured creditor, the amounts received by it could be returned to the liquidation account for appropriate redistribution to the appellant. i) Thereafter, the liquidator had proceeded with the distribution of the sale proceeds, and on 24.04.2023, a sum of Rs. 8,80,00,000/- was distributed to sole financial creditor, the 3rd respondent Bank, in accordance with the waterfall under Section 53 of the Code. j) The appellant participated in subsequent meetings of the Stakeholders' Consultation Committee, including the meeting held on 25.08.2023, wherein the distribution already effected was recorded. k) The liquidator thereafter, moved an application in I.A.1077 of 2023 under Section 54 of the Code s....
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....y virtue of Sec. 9(2) of the Central Sales Tax Act, 1956, the provisions of the State enactment extend to CST dues as well, and therefore the statutory charge covers the entirety of the appellant's claim. Reliance was placed on the Division bench judgement of the Delhi High Court in IFCI Ltd. Vs Commercial Tax Officer, [2011 SCC OnLine Del 2563], where the Court has held that the CST dues partake the same character as State VAT dues by virtue of Section 9(2) of the CST Act. e) In State Tax Officer Vs Rainbow Papers Pvt. Ltd., [(2023)9 SCC 545] which later confirmed in review [See (2024)2 SCC 362], the Hon'ble Supreme Court has held that the statutory dues under the GVAT Act is required to be treated as a secured debt and the State as a secured creditor. f) Inasmuch as the appellant is required to be treated as a secured creditor, since it has not chosen to enforce its security right, the same has to be treated as relinquishment of security interest under Sec. 52(1)(a) read with Proviso to Regulation 21A(1) of the IBBI (Liquidation Process) Regulations, 2016, and hence it is entitled to be treated at par with other secured creditors under Section 53(1)(b)(ii) of th....
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....s in an information utility, (ii) registration with the Registrar of Companies, or (iii) registration with CERSAI. The appellant has not satisfied any of them. Indeed, under Sec. 77(3) of the Companies Act, 2013, when no charge created by a company shall be taken into account unless it is duly registered. In other words, even if a statutory charge is presumed to exist in abstract, the same cannot be recognised in liquidation unless it is capable of being proved in the manner contemplated under Regulation 21. Reliance was placed on the dictum of the Adjudicating Authority in Uttar Gujarat Vij Company Ltd. v. Pradeepkumar Kabra (IA 883/2024) and Government of Tamil Nadu Vs Chandra Mouli Ramasubramaniam (IA (IBC) 864(CHE)/2023), to contend that statutory authorities cannot be treated as secured creditors in the absence of legally cognizable proof of security. In Brihanmumbai Electric Supply & Transport Undertaking Vs Ashok Kumar Golecha, [2025 SCC OnLine NCLAT 808], which has since been affirmed by the Hon'ble Supreme Court in Civil Appeal No. 9927 of 2025 (decided on 08.08.2025), it was held that registration or equivalent proof is indispensable for recognition of secured status. In ....
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.... to create a charge, but the fact remains that the appellant was not willing to surrender its right to be treated as a secured creditor. Turning to the decision of the liquidator to treat the appellant's claim as operational statutory debt, it is very evident that this decision was taken not because the liquidator had the materials to hold that the appellant was not eligible to be treated as a secured creditor within the meaning of Sec. 3(30) read with 3(31) IBC, but because he was uncertain about it. In the 6th meeting of the SCC held on 21.04.2023, he has shred the legal opinion on the status of the appellant. It is minuted, " The liquidator brought to the notice of the stakeholders that there is some confusion regarding the distribution process to be followed, in Liquidation, due to the recent judgement in the "Rainbow Papers Case" by the Hon. Supreme Court. More importantly the treatment of the claim of State Tax Office needs to be looked at carefully. The Liquidator added that he has classified the claim of the State Tax Office as a "Secured Operational Creditor - government Dues". But in the 7th meeting of the SCC held on 25.08.2023, the Liquidator changes position in view of....
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....The need for proof of security interest as required in Regulation 21 of the Liquidation Process Regulation therefore, requires to be contextually understood. More about it in later paragraphs. Whether the entire claim of the appellant is required to be treated as secured debt: 12. The Claim of the appellant has two distinct components: the VAT component and the CST component. The appellant claims statutory first charge for the entirety of its claim. So far as the VAT dues are concerned, there can be no doubt that the appellant is a secured creditor, but the issue concerning it is not on the legal effect of Sec. 48 of the GVAT Act, but on how it is required to be proved during the liquidation process. An associated aspect that may be mentioned here is that while the Rainbow Papers case declared the law on the effect of the operation of Sec. 48 of the GVAT Act, 13. The issue therefore would be twofold: (a) whether the CST dues qualify for being treated as secured debt? (b) how to prove the security interest created by operation of law under Sec. 48 of the GVAT Act? 14. So far as CST dues are concerned, there is no specific provision in the CST Act which creates statuto....
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....out the point where such priority should be accorded. Should it be given priority over secured debts? In Dena Bank Vs Bhikhabhai Prabhudas Parekh & Co and others [(2000)5 SCC 694], after considering Builders Supply Corporation case the Supreme Court has held: "10.... the crown's preferential right to recovery of debts over other creditor is confined to ordinary or unsecured creditor. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor. It is only in cases where the Crown's right and that of the Subject meet at one and the same time that the Crown is in general preferred. Where the right of the subject is complete and perfect before that of the King commences, the rule does not apply, for there is no point of time at which the two right are at conflict, nor can there be a question which of the two ought to prevail in a case where one, that of the subject, has prevailed already. In Giles Vs Grover, (1832) 131 ER 563, it has been held that the Crown has no precedence over a pledgee of goods. In Bank of....
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....BBI (Liquidation Process) Regulation. According to the liquidator, while the appellant claimed security interest in terms of Sec. 48 of the GVAT Act, it has not produced any proof that it indeed was created. In particular, the appellant had communicated to the mamlatdar to create security interest, but it was not done. Secondly, the appellant required the liquidator himself to create security interest, but it was declined by the latter for want of authority to do it. In fitness of things, the appellant should have registered the charge under Sec. 77(3) of the Companies Act to prove the security interest created for the purposes of Regulation 21 of the Liquidation Process Regulations. 20. Regulation 21 reads: "21. Proving security interest: The existence of a security interest may be proved by a secured creditor upon the non-payment of a claim, if any. a) The information available in an information utility, if any; b) Certificate of registration of charge issued by the Registrar of Companies; or c) proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India." Regulation 21 a....
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....tutory charge under Sec. 48 of the GVAT is thus created the moment assessment Order is made. Secondly, nowhere a provision is made either in the GVAT Act or in the Rules made thereunder any procedure for effecting the charge. In other words, the statutory first charge in terms of Sec. 48 of the GVAT requires no further action to be made to make the charge operational beyond the passing of the assessment order. This precisely is what flows from the dictum in Shree Radhakrushna Ginning case. The liquidator apparently has not approached the issue in the right way and has tried to apply proof required in the context of contractual charge to proving the statutory first charge. The proof required for establishing the statutory first charge of the kind created by Sec. 48 of the GVAT Act is the statute itself and no more. 22. The next argument in the context of proof of statutory charge is that the appellant has indicated NA in the column in the Claim Form where it is required to furnish the details of the security interest. Now, if the statutory first charge is the legal consequence of an assessment Order, can the liquidator plea ignorance of Sec. 48 of the GVAT Act and its effect? In ....
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....erty is not the same as an attachment of a property. On Acquiescence and Waiver 25. To this may also be added rule of estoppel. In our view, none operates to affect the entitlement of the appellant to be treated as a secured creditor vis-à-vis its VAT claim. The reasons are: a) At no time the appellant has waived its right to be treated as a secured creditor, but is seen actively pursuing it. It may have made a huge demand to include its entire claim, but the fact remains that it has been persisting with its demand. b) Secondly, in the 6th meeting of the SCC, the liquidator has treated the appellant as a secured operational creditor, but in the 7th and the last meeting of the SCC he doubted his own earlier view, and has gone ahead to file his I.A.1077 of 2023 for dissolution of the CD. Therefore, the only time and perhaps the first opportunity the appellant gets to challenge the way it is decided to be treated has come only after the 7th meeting. It is in these circumstances, the sole financial creditor, the 3rd respondent herein, has given its undertaking on 21.04.2023. It reads: "we understand that as per Regulation 43 of by the IBBI Liquidation Pro....