The National Company Law Tribunal, Chennai bench, disposed of the application filed by the Canara Bank of India under Section 60(5) of the IBC and held that the income tax department’s claim cannot be treated as a secured creditor and hence cannot be given preference by sidelining the process under section 53 of the IBC, 2016.
The tribunal issued an order for the corporate debtor’s CIRP, and then it ordered the start of the liquidation process. The liquidator requested creditors to submit claims in a public notification on January 8, 2022. Based on a previous attachment of the corporate debtor’s property in 2017 for unpaid tax dues, the liquidator gave the Income Tax Department Rs 1.12 Cr. during the liquidation term. Canara Bank contested this payment, claiming that because the Income Tax Department was not a secured creditor, it was in violation of the priority order under Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016.
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The petitioner contended that the income tax department had seized the corporate debtor’s mortgaged property because of non-payment of taxes before the CIRP and liquidation procedures. The respondent’s failure to submit the claim to the liquidator within the allotted time frame was emphasized.
The applicant treated the income tax department as a secured creditor u/s 53 of the IBC, 2016. The applicant argued that the respondent cannot be treated as a secured creditor.
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The liquidator argued that within the time frame given in the advertisement, the income tax agency submitted their claim to him. Additionally, it was noted that the liquidator invited the income tax department to attend the second SCC meeting; following this, the list of amended claims was submitted to the tribunal and approved.
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The liquidator emphasized that the reason the income tax department was declared a secured creditor was because a security interest was attached in its favor. Additionally, it noted that the applicant never raised any objections to the Income Tax Department’s inclusion. It was argued that the authority is included as a secured creditor and that the statutory liability must be handled in accordance with Section 53 of the IBC if the attachment supports it.
The NCLT found that the income tax department failed to file their claim with the liquidator within the time specified by the IBC.
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The bench comprising Shri Jyoti Kumar Tripathi (Member-Judicial) and Shri Ravichandran Ramasamy (Member-Technical) observed that the ratio established in the Rainbow Paper Mills case does not apply in this instance since the income tax obligations are sovereign debts and cannot be classified as secured debt because the attachment was performed in order to collect the debt.
Given the overriding nature of the IBC, the income tax department’s only option for collecting the debt is to file a claim using the process outlined in section 53 of the IBC. Any attachment of the corporate debtor’s assets in an attempt to collect the debt would not survive.
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The bench further pointed out that the Income Tax Department appears to be an operational creditor because the claim was submitted on Form B. The bench observed that, as per the ruling of State Bank of India vs. The Tax Recovery Officer, Income Tax Department, the income tax department cannot claim priority over the secured creditors based on an attachment. The bench finally held that the liquidator erred in treating the Income Tax Department as a secured creditor, and it also failed to consider the ruling of Paschimanchal Vidyut Vitran Nigam Ltd.
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The NCLT concluded that the income tax department’s claim cannot be treated as a secured creditor and hence cannot be given preference by sidelining the process under section 53 of the IBC, 2016.
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