Tax is a secured interest and the State is a secured creditor - this judgment will create more confusion

Cause Title : State Tax Officer (1) vs Rainbow Papers Limited, Supreme Court Of India, Civil Appeal No. 1661 Of 2020

Date of Judgment/Order : September 6, 2022

Corum : Indira Banerjee & A.S. Bopanna, JJ

Citied: 

1. Ghanshyam Mishra & Sons (P) Ltd. V. Edelweiss Asset Reconstruction Co. Ltd.
2. Ebix Singapore Private Limited V. Committee of Creditors of Educomp Solutions Limited and Another
3. Vishal Saxena & Anr. v. Swami Deen Gupta Resolution Professional
4. Assistant Commissioner of Customs v. Mathur Sabhapathy Vishwanathan

Background

The Tax Dept. claiming that an amount of Rs.53,71,65,489/- is due from the Respondent, initiated recovery proceedings around 2016 against the respondent, in respect of its dues for the year 2011- 2012, and the appellant attached the property of the respondent.

One Neeraj Papers Private Limited, as operational creditor of the respondent, filed an application under  the IBC before Ahmedabad Bench of the National Company Law Tribunal (NCLT), for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent which was admitted in 2017. The appellant filed a claim before the RP in the requisite Form B, claiming that Rs.47.36 crores , was due and payable by the respondent to the appellant, towards its dues under the GVAT Act. The claim was filed beyond time. By a letter dated 22nd October, 2018, the Resolution Professional informed the appellant that the entire claim of the appellant had been waived off. The order of the RP was conveyed to the appellant by an email dated 6th November, 2018. The appellant challenged the Resolution Plan by making an application the NCLT contending that Government dues could not be waived off on the ground that the Sales Tax Officer was a secured creditor which was rejected as not maintainable. Appeal before the NCLAT was also dismissed for 2 reasons : 1) the claim has not been filed within time and 2) the Government cannot claim first charge over the property of the ‘Corporate Debtor’ as Section 48 cannot prevail over Section 53. Therefore, the Appellant – ‘State Tax Officer-(1)’ do not come within the meaning of ‘Secured Creditor’ as defined under Section 3(30) read with Section 3(31) of the I&B Code.

The matter finally reached the Supreme Court.

The short question raised by the appellant in this appeal was, whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act.

Judgment

The SC decided that :-

1. the term “Secured Creditor” as defined under the IBC is comprehensive and wide enough to cover all types of security interests namely, the right, title, interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.
2. The statutory charge in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely falls 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.
3.  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.
4. A resolution plan which does not meet the requirements of Sub- Section (2) of Section 30 of the IBC, would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor.
5. 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.

Note:

In catena of judgments, tax dues have always been held to be subservient to dues of secured creditors. This judgment will now add to the confusion.