Statutory tax claims do not constitute a secured debt, as the IBC’s waterfall mechanism prevails over conflicting state laws
- REEDLAW
- Oct 12, 2024
- 3 min read
Statutory tax claims do not constitute a secured debt, as the IBC’s waterfall mechanism prevails over conflicting state laws.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench led by Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Naresh Salecha and Mr. Indevar Panday reviewed an appeal and observed that the statutory tax claims under the Madhya Pradesh VAT Act, 2002, do not constitute secured debt for insolvency purposes, as the IBC’s waterfall mechanism under Section 53 prevails over conflicting state laws, and the provisions of the MPVAT Act are not pari materia with Section 48 of the Gujarat VAT Act interpreted in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519.
M/s Chandraudai Automobiles Pvt. Ltd. initiated insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), against M/s Rajpal Abhikaran Pvt. Ltd., which was admitted by the NCLT Indore Bench on 26.03.2021. Ms. Teena Saraswat was appointed as the Interim Resolution Professional (IRP) and formed the Committee of Creditors (CoC), comprising financial creditors. A resolution plan submitted by Agarwal Real City Pvt. Ltd. was approved by the CoC with a 90.41% majority on 17.12.2021, valuing the debtor’s assets at Rs. 22.61 crores. Given the liquidation value of Rs. 18.39 crores, the plan allocated NIL payment to operational creditors, consistent with their zero liquidation value.
Following approval of the resolution plan by the NCLT on 25.08.2022, the Commercial Tax Department of Madhya Pradesh appealed, arguing that its statutory dues of Rs. 12.61 crores should have been treated as secured debt under Section 33 of the MPVAT Act, 2002. Relying on the Supreme Court's decision in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519, the appellant contended that their claim held a first charge over the corporate debtor’s assets. However, the respondents countered that Section 33 of the MPVAT Act differs materially from Section 48 of the Gujarat VAT (GVAT) Act, which had been interpreted in the Rainbow Papers case. They pointed out that the appellant had submitted its claim as an unsecured creditor using Form B, and no security interest had been demonstrated.
The NCLAT dismissed the appellant’s reliance on State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519, highlighting legal distinctions between Section 33 of the MPVAT Act and Section 48 of the GVAT Act. It noted that Section 33 is subject to any central law creating a first charge, aligning more closely with Section 37 of the Maharashtra VAT (MVAT) Act rather than the GVAT provision. Citing the decision in Zicom Saas Pvt. Ltd., the tribunal reiterated that the waterfall mechanism under Section 53 of the IBC takes precedence over conflicting state laws, thereby validating the CoC's decision to allocate NIL payment to operational creditors.
The NCLAT also referred to the Supreme Court’s ruling in Commissioner of Income Tax v. KTC Tyres (India) Ltd., which clarified that under Section 529A of the Companies Act, 1956, workmen’s dues and secured creditors’ claims take priority over tax claims. The tribunal emphasized that the appellant's tax dues could not be treated as secured debt, given the specific language of the MPVAT Act and the precedence of the IBC’s statutory framework.
Finding no violation of Section 30(2)(b) of the IBC, the NCLAT upheld the resolution plan, concluding that the appellant lacked valid grounds for interference. The appeal was ultimately dismissed, reaffirming the primacy of the IBC's provisions and the CoC's authority in determining the distribution of assets during insolvency proceedings.
Mr. Shashwat Parihar, Mr. Shashwat Anand, Ms. Mrinal Elker Mazumdar, Mr. Deepanshu Badiwal, Mr. Shikhar Mishra, Mr. Rishabh Kumar, Ms. Ritambara, Advocates represented the Appellant.
Mr. Sumesh Dhawan, Mr. Praveen N. Surange, Mr. Shaurya Shyam, Ms. Vatsala Kak, Advocates appeared for Respondent No. 2.
Ms. Shraddha Deshmukh, the Advocate appeared for Respondent No. 1.
Mr. Siddharth Sangal, Mr. Chirag Sharma, Advocates represented the SBI in I.A. 4564/2022.
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