State can be Secured Creditor under IBC Due to Statutory Charge Created u/s 48 of GVAT Act: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) in New Delhi ruled that the State's debts should be treated as secured creditors under Section 53 of the Insolvency and Bankruptcy Code, 2016 (Code) because, after the corporate debtor's assessment under the Gujarat Value Added Tax (GVAT) Act is completed before the Corporate Insolvency Resolution Process (CIRP), a charge under Section 48 of the GVAT Act is created by operation of law on the corporate debtor's property in favor of the State Tax Officer.

On January 16, 2020, M/s Harsh Foundry Fluxes & Alloys filed an application against Twenty-First Century Castings Pvt. Ltd. (Corporate Debtor) under Section 9 of the Code, and it was accepted. The sole resolution applicant was M/s Suryadeep Alloys Steel Casting Pvt. Ltd. After the plan was approved by the Committee of Creditors (CoC) on August 28, 2020, with 100% of the vote, Resolution Professional (RP) submitted an application with I.A. No. 591 of 2020 to the Adjudicating Authority under Section 30(6) r/w Section 31 of the Code to request approval of the resolution plan.

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The aforementioned application was granted by the contested order dated December 9, 2020. Section 61 of the Code has been used to submit the current appeal against this order. In accordance with the GVAT Act, 2003 (the "Act") and the CST Act, the appellant claimed that a charge had been established on the CD's property by operation of law since a total of Rs. 11,70,47,801/-had accumulated for the assessment years 2009–11 and 2014–16.

It was further argued that, despite the admission of Rs. 11,70,47,801/-, the Appellant, an operational creditor, has not received any payment under the plan.

The Respondent argued, however, that the Appellant had only filed the proof of claim as an Operational Creditor (OC) and that statutory obligations to the government, including VAT, GST, and other taxes, do not qualify as secured debt unless they are expressly supported by a registered charge.

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Furthermore, it was argued that unless supported by a legitimate security interest, electricity dues or statutory dues owed to government bodies do not have precedence over secured creditors or other classes. As a result, the appellant's dues, which fall under the definition of government dues, will rank lower in priority under Section 53(1)(e)(i) of the Code in liquidation.

The bench of Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member) observed that the Respondent's argument that the decision in Paschimanchal Vidyut Vitran Nigam Ltd. casts doubt on the correctness of Rainbow Papers is of no merit, as Rainbow Papers remains good law and has not been overruled by the Supreme Court.

The Supreme Court's interpretation of Section 48 of the GVAT Act, which is crucial to the current appeal, makes the Respondents' claims that the Appellant filed its claim in Form B as an Operational Creditor or that the CoC approved the plan in its wisdom irrelevant, it further added.

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Based on the aforementioned, it was held that "according to Section 48 of the GVAT Act, a charge was created on the CD's property by operation of law in favor of the appellant, as a result of which the appellant is entitled to be treated as secured creditor under Section 53 of the code."

According to Section 30(2) of the Code, the Tribunal found that the resolution plan violates the statutory provisions and is immediately affected by the Supreme Court's ruling in the Rainbow Papers (Supra) case, which is obviously a case of material irregularity.

The appeal was allowed, and the impugned order was set aside.

To Read the full text of the Order CLICK HERE

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