The Supreme Court of India, upheld the Value Added Tax (VAT) Department’s claim for first charge over property of the corporate debtor, Rainbow Papers Limited and held that State is a ‘Secured Creditor’ under the Insolvency and Bankruptcy Code, 2016 (IBC).
By a letter, the Resolution Professional in the insolvency claim of the respondent informed the appellant that the entire claim of the appellant had been waived off. The appellant challenged the Resolution Plan by making an application being I.A No. P-01 of 2019 before the Ahmedabad Bench of the National Company Law Tribunal(NCLT), contending that Government dues could not be waived off. The appellant prayed for payment of total dues of Rs.47,35,72,314/- towards VAT/CST on the ground that the Sales Tax Officer was a secured creditor.
The NCLT and through the order-in-appeal, the National Company Law Appellate Tribunal (NCLAT),however, dismissed the claim of the appellant on grounds of delay in filing the claim within the timelines stipulated in the IBC and on the basis of law laid down in Section 48 against Section 53 of the Gujarat Value Added Tax (GVAT) Act. The appellant, aggrieved by the orders, filed the present appeal before the Supreme Court of India.
In regards to the delay in filing the claim, it was held by the Apex Court that the time lines stipulated in the IBC even for completion of proceedings are directory and not mandatory. Thus, the state was entitled to the benefit in spite of delay in filing claim as held by the court that, “there was no obligation on the part of the State to lodge a claim in respect of dues which are statutory dues for which recovery proceedings have also been initiated. The appellants were never called upon to produce materials in connection with the claim raised by the Appellants towards statutory dues.”
The Solicitor General of India, Tushar Mehta submitted on behalf of the State that “ 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”, which was agreed to by Justice Indira Banerjee, who headed the single bench that heard the case. The Supreme Court expressed its view as, the NCLAT clearly erred in its observation that Section 53 of the IBC overrides Section 48 of the GVAT Act.
In conclusion, it was observed that “Section 48 of the GVAT Act 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 GVAT Act.” and that “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.”
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