NCLAT Quashes Resolution Plan for Violating IBC Provisions & Ignoring Government Dues

The Delhi bench of the National Company Law Appellate Tribunal (NCLAT) quashed a resolution plan for Twenty-First Century Castings Pvt. Ltd., noting violations of the Insolvency and Bankruptcy Code (IBC), 2016, and failure to settle statutory dues owed to the Gujarat State Tax Department.

The main issue in this case was whether government tax dues should be treated as secured debt under the IBC.

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Coming to the facts of the case, M/s Harsh Foundry Fluxes & Alloys initiated insolvency proceedings against Twenty First Century Castings Pvt. Ltd. (the corporate debtor) under Section 9 of the Insolvency and Bankruptcy Code.

The Corporate Insolvency Resolution Process (CIRP) began on January 16, 2020, with Saurabh Zaveri appointed as the Interim Resolution Professional (IRP). Later, Premraj Ramratan Laddha replaced him as the Resolution Professional (RP). The Committee of Creditors (CoC) approved a resolution plan submitted by M/s Suryadeep Alloys Steel Casting Pvt. Ltd., the sole resolution applicant, on August 28, 2020. The plan was subsequently approved by the Adjudicating Authority on December 9, 2020.

The State Tax Officer approached the NCLT against the resolution plan, contending that it failed to allocate any funds for admitted tax dues of Rs. 11.70 crore under the Gujarat Value Added Tax (GVAT) Act and the Central Sales Tax (CST) Act.

It was submitted by the department that these dues, pertaining to assessment years 2009-11 and 2014-16, constituted a secured debt under Section 48 of the GVAT Act, which creates a statutory first charge on the debtor's property.

The department’s counsel relied on the decision of the apex court in the case of State Tax Officer Vs. Rainbow Papers Limited (2022) SCC OnLine SC 1162, in which the Hon’ble Supreme Court has relied upon section 48 of the GVAT Act and CST Act and held that the State Tax Department is a secured creditor.

The respondents, including the RP and the resolution applicant, argued that statutory dues like taxes do not automatically qualify as secured debt unless backed by a registered charge.

The NCLAT, however, sided with the tax department, ruling that the *Rainbow Papers* judgment remains binding and unequivocally establishes that statutory dues under GVAT create a secured interest by operation of law.

The bench relied on the decision of the Supreme Court in the case of Rainbow Papers in which the court held that “ if a company is unable to pay its debts, which should include its statutory dues to the government and/or other authorities, and there is no plan which contemplates dissipation of those debts in a phased manner or uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.”

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The tribunal noted that the resolution plan violated Section 30(2) of the IBC and that it is a clear case of material irregularity.

NCLAT, comprising Justice Rakesh Kumar Jain (Judicial Member) and Naresh Salecha (Technical Member), allowed the appeal and set aside the impugned order. The matter was remanded back to the Adjudicating Authority for fresh consideration, directing that the tax department's dues be treated as secured debt.

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