9 September 2022
Supreme Court rules that State Government is a secured creditor under IBC

In a significant judgment given on 6 September 2022, the Hon'ble Supreme Court held that the State Government is a secured creditor under the Insolvency and Bankruptcy Code, 2016 (IBC). It further reiterated the position that a resolution plan that is not consistent with Section 30(2) of IBC would be invalid and not binding on stakeholders. The issue involved in this far-reaching judgment is summarized in the following paragraphs.

Brief facts
  • The aforesaid judgment emanates from the appeal filed by the State Tax Officer, Gujarat (STO) under Section 62 of IBC against the order of the National Company Law Appellate Tribunal (NCLAT) in the matter of the corporate resolution process of Rainbow Papers Limited.
  • The STO submitted a claim of INR 473.6 million to a resolution professional, which was due and payable to the Department towards its dues under Gujarat's Value Added Tax Act, 2003. However, the resolution professional rejected the claim saying it was submitted beyond the prescribed time. National Company Law Tribunal (referred to as Adjudicating Authority under IBC) Ahmedabad Bench ruled in favor of the resolution professional and dismissed STO's contention.
  • The STO appealed further, however, the NCLAT dismissed it and upheld the finding of Adjudicating Authority holding that the government cannot claim the first charge over the property of the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax, 2003, which provides for the 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 Act, cannot prevail over Section 53 of the IBC.
  • NCLAT inter alia held that (i) STO not filed a claim within the prescribed time period; (ii) the government cannot claim the first charge over property of the corporate debtor; and (iii) STO does not come within the meaning of 'secured creditor' as defined under Section 3(30) read with Section 3(31) of IBC.
  • STO filed an appeal before Hon'ble Supreme Court against the order of NCLAT.
Summary of Hon'ble Supreme Court judgment

On hearing the arguments, the Hon'ble Court decided in favor of STO. The summary of the Hon'ble Courts judgment is as follows:
  • Referring to various precedents, the Hon'ble Court reiterated that the time stipulation regarding the submission of claim given in resolution process regulations is, however, not mandatory but only directory.
  • Under Section 31 of the IBC, a resolution plan as approved by the Committee of Creditors under sub-section (4) of Section 30 might be approved by the Adjudicating Authority only if the Adjudicating Authority is satisfied that the resolution plan as approved by the Committee of Creditors meets the requirements as referred to in sub-section (2) of Section 30 of the IBC.
  • The condition precedent for approval of a resolution plan is that the resolution plan should meet the requirements of sub-section (2) of Section 30 of the IBC. If the resolution plan ignores the statutory demands payable to any State Government or legal authority altogether, the Adjudicating Authority is bound to reject the resolution plan.
  • 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.
  • Section 48 of the Gujarat Value Added Tax Act, 2003, 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 aforesaid 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.
  • The State is a secured creditor under Gujarat Value Added Tax Act, 2003. Section 3(30) of the IBC defines a secured creditor to mean a creditor in favor of whom security interest is credited. Such security interest could be created by the operation of law. The definition of a secured creditor in the IBC does not exclude any government or Governmental Authority.
  On the above grounds, the Hon'ble Court allowed the appeal and set aside the NCLAT order and resolution plan.
Our Comments
The judgment is significant and likely to have far-reaching consequences as it categorized government dues as a secured creditor. Thus far, government dues were considered as operational debt and having the order of priority after unsecured financial creditors in case of liquidation. The Hon'ble Court has tried to resolve a conflict between Section 53 of IBC and 48 of Gujarat Value Added Tax Act, 2003, stating that the former does not override the latter. However, such a distinction made has categorized the government as a secured creditor. The tax statutes with pari materia provisions like Gujarat Value Added Tax Act, 2003, are likely to state this as precedent to treat themselves as a secured creditor and this particular issue will have far-reaching consequences on the IBC process. This will enable the government to claim priority equally with secured creditors and workmen. This may defeat the intent and explicit purpose of IBC. Also, it may open doors to litigations between the tax departments and corporate debtors/resolution applicants.
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