Read Time: 08 minutes

Synopsis

"If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan", the Supreme Court has held.

Court has further held that if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.

A bench of Justices Indira Banerjee and AS Bopanna has further held that the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.

Court made these observations while allowing an appeal filed by the State Tax Officer.

The Officer challenged an order of the NCLT rejecting the application filed by it and holding that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax, 2003 (GVAT) which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. under the said GVAT Act, cannot prevail over Section 53 of the IBC.

This order was also upheld by the NCLAT. 

The top court noted that there was no obligation on the part of the State to lodge a claim in respect of dues which are statutory dues for which recovery proceedings have also been initiated.

Court also agreed that Solicitor General rightly argued that in view of the statutory charge in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely fell within the definition of “Security Interest” under Section 3(31) of the IBC and the State becomes a secured creditor under Section 3(30) of the Code.

The observation of Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT) that the claim of the State is belated was also not agreeable to the Supreme Court.

"Regulation 12 of the 2016 Regulations deals with the time period for submission of a claim along with proof, as stipulated in the public announcement under Section 15 of the IBC. The time period is, however, not mandatory but only directory", the division bench held.

With this view, Court held that the NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act as Section 53 of the IBC begins with a non-obstante clause which reads: “Not withstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority...........”.

"Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date...", further held the bench.

Court also held that the State is a secured creditor under the GVAT Act.

"Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority", added the bench.

Case Title: STATE TAX OFFICER (1) vs. RAINBOW PAPERS LIMITED