NCLAT Affirms Statutory Tax Charge as Secured Interest under GVAT, Upholding Priority Distribution under IBC
- REEDLAW
- 8 hours ago
- 5 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal clarified the treatment of statutory charges created under State VAT legislation in insolvency proceedings. The Tribunal affirmed that a statutory first charge created under the Gujarat Value Added Tax Act amounts to a security interest under the Insolvency and Bankruptcy Code, thereby entitling the relevant tax authority to priority distribution even after the approval and implementation of a resolution plan. The decision underscores the continuing effect of statutory charges and reinforces the binding nature of Section 53 distribution principles where earmarked funds remain undistributed.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member), while adjudicating an appeal arising from distribution disputes post-approval of a resolution plan, held that the statutory first charge created under Section 48 of the GVAT Act qualifies as a security interest within the meaning of the IBC. The Tribunal observed that amounts earmarked for distribution prior to plan implementation must be released in accordance with Section 53, irrespective of objections raised by the financial creditor, as the State Tax Department continues to hold secured-creditor status by virtue of the statutory charge.
The appeal had been filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the order dated 22.02.2024 by the Adjudicating Authority, which directed the Resolution Professional to release ₹1,31,19,769.08 to the State Tax Department after treating it as a secured creditor under Section 48 of the GVAT Act. The Appellant, being the sole Financial Creditor and sole member of the Committee of Creditors, asserted that the Adjudicating Authority had exceeded its jurisdiction by modifying the distribution mechanism of a Resolution Plan that had already been approved on 29.06.2022 and fully implemented. It was their case that no adjudicatory forum had the authority to reopen or revise an approved plan that had attained finality under Section 31(1) of the Code.
It was noted that the CIRP had commenced on 10.11.2020, after which the State Tax Department filed a claim of ₹38.58 crore, which came to be admitted only to the extent of ₹3.37 crore as an unsecured operational debt. The Resolution Plan submitted by the Successful Resolution Applicant had received 100% voting approval from the CoC and was subsequently sanctioned by the Adjudicating Authority. During implementation, the Resolution Professional withheld a sum of ₹1.31 crore from the distribution payable to the Appellant, citing the pending legal position regarding statutory dues and the then-reserved judgment in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519. Even though the State Tax Department neither challenged its unsecured classification nor filed any appeal against the approved plan, the Adjudicating Authority later directed the release of the withheld amount to the State Tax Department by treating it as a secured creditor.
The Appellant argued that the Adjudicating Authority lacked jurisdiction to reclassify a creditor or modify plan distributions after the plan had been approved and implemented. It is submitted that reopening distribution after two years would undermine the doctrine of finality governing resolution plans and disrupt the commercial wisdom of the CoC. The Appellant further contended that the State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519 judgment was inapplicable and could not retrospectively alter creditor status, particularly in the absence of any challenge by the concerned creditor to the approved plan.
In response, the Resolution Professional submitted that he had acted with caution by withholding the disputed amount pending the Supreme Court’s pronouncement in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519. Following the Supreme Court’s declaration that statutory charges under Section 48 of the GVAT Act amounted to a security interest, the Adjudicating Authority directed the release of the earmarked amount, which the Resolution Professional complied with. The State Tax Department maintained that its dues arose prior to the commencement of CIRP, that its assessment orders had attained finality, and that the statutory charge created under the GVAT Act conferred on it the status of a secured creditor under the IBC.
Upon examining the record, the Appellate Tribunal observed that the Corporate Debtor’s properties had been attached by the State Tax Department as early as July 2019, well before the commencement of CIRP. This attachment had been disclosed in the Corporate Debtor’s books of accounts and in the Form-B claim submitted on 1 December 2020. The Tribunal noted that the Resolution Professional had always been aware of this statutory charge, had filed I.A. 522/2021 seeking removal of the attachment, and had informed the Adjudicating Authority on 13 December 2022 that the relevant amount had been earmarked separately pending adjudication.
The Tribunal further recorded that the State Tax Department had consistently asserted its secured status, supported by judgments of the Gujarat High Court and the Supreme Court’s ruling in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519, which clarified that a statutory first charge constituted a security interest under Sections 3(30) and 3(31) of the Code. Since the earmarked amount had not been distributed even after approval of the Resolution Plan, the Tribunal held that the Adjudicating Authority had rightly directed distribution of the amount to the State Tax Department as a secured creditor in accordance with Section 53 of the IBC.
The Appellate Tribunal therefore upheld the order directing release of the reserved amount to the State Tax Department and found no error in the dismissal of the Financial Creditor’s applications seeking release of the same funds. The Tribunal concluded that the Adjudicating Authority’s direction was consistent with statutory provisions and binding judicial precedents, and accordingly affirmed the legality of the distribution.
Mr. Ramchandra Madan and Mr. Tushar Nigam, Advocates, represented the Appellant.
Mr. Honey Satpal, Mr. Nipun Singhvi, Ms. Pooja Singh, and Mr. Akash Agarwalla, Advocates, appeared for the Respondent No. 1/RP.
Ms. Ritu Guru, Advocate, appeared for the State Tax Officer, Gujarat.
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