The NCLAT, New Delhi, ruled that if the assessment orders become absolute much prior to initiation of Corporate Insolvency Resolution Process (CIRP) and the attachment was already enforced, then the State already had a secured right over the property of the Corporate Debtor (CD).
Finding that even before the CIRP began, the State Tax Department had already attached the Corporate Debtor’s property, the Appellate Tribunal held that this attachment created a valid security interest in favour of the State.
Reference was made to the decision of the Gujarat High Court in the case of Shree Radhekrushna Ginning and Pressing Pvt Ltd. vs. State of Gujarat [C/SCA/5413/2022], where it was held that once an assessment is made and attachment is affected, a charge over the immovable property comes into existence by operation of Section 48 of the Gujarat VAT Act.
The Division Bench comprising Justice Yogesh Khanna (Judicial Member) and Indevar Pandey (Technical Member) referred to the decision of the Supreme Court in Rainbow Papers [(2023) 9 SCC 545], to reiterate that dues covered by Section 48 of the GVAT Act amount to a “security interest” under Section 3(31) of the IBC, and hence the State Tax Department qualifies as a secured creditor.
The Bench also observed that Section 238 of the IBC gives an overriding effect over other laws only when there is inconsistency. However, where a statutory first charge under another law is recognized as a “security interest” within the meaning of the IBC itself, there is no inconsistency.
Thus, both the laws operate in harmony, and Section 48 of the GVAT Act and Section 53 of the IBC can co-exist, and the Adjudicating Authority’s interpretation ensures this harmony, added the Bench.
Briefly, after the Sterling Lam Limited entered insolvency in 2020, the Gujarat State Tax Authority filed a claim for Rs. 38.58 crores, of which Rs. 3.37 crores were admitted, resulting in attachment of the company’s factory land in 2019 for unpaid VAT dues. This attachment was disclosed during the claim process before the Resolution Professional. Following the CIRP, the Committee of Creditors approved a resolution plan, which was opposed contending the removal of the attachment.
The appellant, the sole financial creditor, argued that the resolution plan had achieved finality and that the State had already accepted unsecured treatment under the plan. It contended that the NCLT had no jurisdiction to reopen distribution after plan approval. Opposing the same, the State Tax Department countered that Section 48 of the GVAT Act created a statutory first charge by operation of law, and that it had expressly asserted secured status much before the resolution plan was approved.
Appearances:
Advocates Ramchandra Madan and Tushar Nigam, for the Appellant
Advocates Honey Satpal, Nipun Singhvi, Pooja Singh, Akash Agarwalla, and Ritu Guru, for the Respondent
