Article

The Supreme Court on the appeal of a Sales Tax Officer of the Gujarat government against the 2019 judgment passed by the National Company Law Appellate Tribunal (NCLAT), in the matter of State Tax Officer (1) Vs. Rainbow Papers Ltd. [Civil Appeal NO. 1661 of 2020 decided on 06.09.2022] while answering the issue whether the provisions of the IBC, in particular, Section 53, overrides Section 48 of the Gujarat Value Added Tax, 2003 (GVAT Act), has held that the provisions are neither inconsistent or in conflict with one another and therefore there is no question of overriding. The State would be considered a secured creditor under the GVAT Act under Section 53(1)(b)(ii) and a resolution plan which ignores the statutory demands payable to state governments, or legal authorities, is liable to be rejected. The Court observed that the definition of secured creditor in the Insolvency and Bankruptcy Code (IBC) does not exclude any government or legal authority.

Section 48 of the GVAT Act provides that : “Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.” Section 53 of Insolvency and Bankruptcy Code, 2016 provides for the waterfall mechanism for the distribution of liquidated assets amongst the creditors of the corporate debtor.

While interpreting the Government dues under section 48 of the GVAT as one of secured creditor within the waterfall mechanism, the Court clarified that the financial creditors of a company cannot secure their own dues in approving the resolution package of a bankrupt company at the expense of other obligations including statutory dues owed to a government authority. The court also clarified that a company would have to be liquidated and its assets sold and distributed in accordance with Section 53 of the IBC if it was unable to pay its debts, which should include any statutory obligations to the government or other authorities, and there is no plan that contemplates dissipating those debts in a phased, uniform proportional reduction.

The appeal was against the National Company Law Tribunal (NCLT) order had passed holding that the government cannot claim first charge over the property of a corporate debtor, as Section 48 of the Gujarat Value Added Tax (GVAT) Act, 2003, which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty, among others, under the said GVAT Act, does prevail over Section 53 of the IBC. The NCLAT affirmed the order of the NCLT.

Setting aside the NCLAT order, the Apex Court held, “In our considered view, the NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act”.