Commercial Tax Dept is Secured Creditor under IBC: Madras HC Directs Auction Purchaser to Recover Purchase Price from CD and Remit for VAT Dues [Read Order]
The only remedy available/left for the Petitioner is to recover the amount from the person to whom amounts were paid by the liquidator through liquidation process, said the court.
Commercial Tax Dept - Secured Creditor - IBC - Madras HC - Auction - Taxscan
Commercial Tax Dept - Secured Creditor - IBC - Madras HC - Auction - Taxscan
In an important, the Madras High Court has held that the Commercial Tax Department qualifies as a ‘secured creditor’ under the Insolvency and Bankruptcy Code ( IBC ) where statutory charges are created on the property of a corporate debtor.
Thus, directed the auction purchaser - petitioner, to recover its purchase consideration from the corporate debtor and remit the amount towards long-pending VAT ( Value added tax ) arrears of the Corporate debtor for vacating the attachment.
RLS Alloys Pvt. Ltd., the 3rd respondent which was ordered into liquidation by the National Company Law Tribunal (NCLT) in June 2019. The Commercial Taxes Department, represented by the Assistant Commissioner Srirangam (GST Circle), had earlier attached its property on 3 February 2016 under the Tamil Nadu VAT Act, 2006, for arrears amounting to over ₹2.11 crore for assessment years 2007-2015.
During the liquidation process, Avenue Realty, the petitioner of the present case, purchased the attached property through a public auction conducted on 24 October 2024, paying ₹3.05 crore. However, the registration of the sale remained stalled because the encumbrance certificate reflected the 2016 attachment order.
Avenue Realty challenged the attachment before the High Court, arguing that under the IBC, statutory attachments must be lifted to enable liquidation sales and that the Department’s belated claims had already been rejected by the Liquidator and later dismissed by the NCLT.
The petitioner contended that the IBC’s “waterfall mechanism” under Section 53 overrides state VAT laws by virtue of Section 238 of the Code, and therefore the Department’s claim stood extinguished.
Justice C. Saravanan, rejecting these arguments, ruled that the Commercial Taxes Department is indeed a “secured creditor” within the meaning of Section 3(30) of the IBC, as statutory dues under the TNVAT Act create a first charge on the property of the dealer. The Court relied heavily on the Supreme Court’s precedent in State Tax Officer v. Rainbow Papers Ltd. (2023) 9 SCC 545, which affirmed that statutory dues backed by a charge fall within “security interest” under Section 3(31) of the IBC.
It was observed by the court that the auction purchaser bought the property on an “as-is-where-is” basis with encumbrances duly reflected in the sale notice and encumbrance certificate. Therefore, the purchaser could not claim immunity from pre-existing statutory charges.
Since the VAT attachment predated the commencement of the Corporate Insolvency Resolution Process (CIRP), the Department’s claim could not be treated as extinguished.
The high court directed Avenue Realty/petitioner/auction purchaser to recover the purchase price already paid to the Liquidator from the corporate debtor/ 3rd respondent/liquidating company and remit it to the State Tax Department towards settlement of VAT arrears.
The Madras Court said that “In my view, the IRP/RP/Liquidator could not have ignored the rights of the 1st Respondent, as the 1st Respondent is a secured creditor within the meaning of Section 3(30) of the Code. Since the 1st Respondent is a secured creditor, registration of Sale Certificate dated 23.01.2025 pursuant to auction held on 24.12.2024 cannot be countenanced. The sale made has seriously compromised the rights of the 1st Respondent as a “secured creditor.”
In addition, the single bench added that “Since the Petitioner has invested a sum of Rs.3,05,55,143/- for purchasing the security interest of the 1st Respondent, the only remedy available/left for the Petitioner is to recover the amount from the person to whom amounts were paid by the liquidator through liquidation process.”
The court directed the liquidator to assist the Petitioner for recovering the amount(s) that may have been paid to the creditors who may have filed claim statements and would have received the amount from the liquidator.
It also clarified that the amount recovered may be paid to the 1 st Respondent. Once the amount is fully paid to the 1st Respondent, the impugned attachment will stand vacated /lifted. Accordingly, the writ petition was dismissed with the above observation.
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