Whether section 48 of the GVAT Act, 2003 override section 53 of the IBC?

INTRODUCTION

Did you know that government secured debt can also be at the same level of priority as workman’s dues in the waterfall mechanism under the IBC? The recent Supreme court ruling in judgment State Tax Officer (1) Vs Rainbow Papers Limited[1] sheds light on this unexplored area of IBC jurisprudence.

BRIEF HISTORY OF THE PARTIES

Respondent was engaged in the business of manufacture and sale of Crafts and Oars within and outside the State of Gujarat. An amount of Rs.53,71,65,489/- was due from the Respondent to the Sales Tax authorities. On or about 8th July, 2016, recovery proceedings were initiated against the respondent, in respect of its dues for the year 2011- 2012, and the appellant attached the property of the respondent being land estate.

The appellant filed a claim before the RP, claiming that Rs.47.36 crores was due and payable by the respondent to the appellant towards its dues under the GVAT Act. After admission of the CIRP and appointment of the RP, one Kushal Limited submitted a Resolution Plan. Various Creditors had objected to the Resolution Plan. The Resolution Professional informed the appellant that the entire claim of the appellant had been waived off.  

The appellant challenged the resolution plan before the Ahmedabad bench of the NCLT which was dismissed on reasons of maintainability. The order was challenged before NCLAT under section 61[2] of the IBC.

DECISION OF NCLAT

NCLAT held that appellant’s claims came at a belated stage i.e., after approval of the ‘Resolution Plan’ by the Adjudicating Authority. Further, appellant would fall under the category of ‘operational creditor’ as defined in section 5(21)[3] of the IBC. Adding to it, the Adjudicating authority held that, since Government cannot claim first charge over the property of the ‘Corporate Debtor’. Section 48 cannot prevail over Section 53.

CONTENTIONS

1.       The appellant-state contended that the Books of Accounts of the Corporate Debtor reflected the liability of the Corporate Debtor to the State in respect of its statutory dues. In abdication of its mandatory duty, the RP failed to examine the Books of Accounts of the Corporate Debtor, verify and include the same in the information memorandum and make provision for the same in the Resolution Plan.

2.       The counsels of appellants further argued that Regulation 12[4] of the 2016 Regulations which deals with the time period for submission of a claim along with proof, as stipulated in the public announcement under Section 15[5] of the IBC is not mandatory but only directory.

3.       The appellants also submitted that the mere fact that a creditor might be an operational creditor would not result in loss of status of that operational creditor as a secured creditor.

DECISION OF THE SUPREME COURT

a.       State is a secured creditor under GVAT, 2003

Section 48 of the GVAT Act which is set out herein below:

“Tax to be first charge on property — 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.”

The claim of the Tax Department of the State, squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC and the State becomes a secured creditor under Section 3(30) of the Code. The mere fact that a creditor might be an operational creditor would not result in loss of status of that operational creditor as a secured creditor.

It was held by Supreme court that. the Committee of Creditors (CoC), which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.

It further held that:

“The State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.”

b.      Delay in filing claim

The learned ASG pointed out that the Appellant had made its claim to the RP long before the resolution plan was approved by the CoC under Section 30(4) of the IBC. Yet, the RP did not include the claim in the Resolution Plan. The court observed that delay in filing a claim cannot be the sole ground for rejecting the claim.

c.       Role of RP and Resolution plan

Under Section 31 of the IBC, a resolution plan as approved by the Committee of Creditors under Section 30(4)[6] might be approved by the Adjudicating Authority only if the Adjudicating Authority is satisfied that the resolution plan as approved by the Committee of Creditors meets the requirements as referred to in Section 30(2) of IBC. The condition precedent for approval of a resolution plan is that the resolution plan should meet the requirements of Section 30(2) of the IBC.

Supreme court reiterated observation in ‘Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another[7]’:

“Essentially, the adjudicating authority functions as a check on the role of the RP to ensure compliance with Section 30(2) IBC and satisfies itself that the plan approved by the CoC can be effectively implemented as provided under the proviso to Section 31(1) IBC. Once the resolution plan is approved by the adjudicating authority, it becomes binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan...”.

d.      Consistency between IBC and GVAT, 2003

As for inconsistency between GVAT, 2003 and IBC, 2016, the SC observed that NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act. Section 53 of the IBC begins with a non-obstante clause. The same is given as follows: -

“Not withstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority...........”

As held by Supreme court, Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.

CONCLUSION

This judgment gives clarity on the limitation of section 53 as it reflects in the non-obstante clause. Secured debts of the government including those created by virtue of GVAT, 2003 cannot be left unenforced on account of it being undefined in the IBC. This judgment opens a new avenue for creditors to enforce their security interest, even if it is not explicitly defined in the IBC legislation.

---

[1] (CIVIL APPEAL NO. 1661 OF 2020)

[2] Appeals and Appellate Authority

(1) Notwithstanding anything to the contrary contained under the Companies Act 2013, any person aggrieved by the order of the Adjudicating Authority under this part may prefer an appeal to the National Company Law Appellate Tribunal.

(2) Every appeal under sub-section (1) shall be filed within thirty days before the National Company Law Appellate Tribunal:

[3] "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority

[4] Submission of proof of claims

(1) Subject to sub-regulation (2), a creditor shall submit 45[claim with proof] on or before the last date mentioned in the public announcement.

(2) A creditor, who fails to submit claim with proof within the time stipulated in the public announcement, may submit the claim with proof to the interim resolution professional or the resolution professional, as the case may be, on or before the ninetieth day of the insolvency commencement date.

(3) Where the creditor in sub-regulation (2) is a financial creditor under regulation 8, it shall be included in the committee from the date of admission of such claim: Provided that such inclusion shall not affect the validity of any decision taken by the committee prior to such inclusion.

[5] “The public announcement of the corporate insolvency resolution process under the order referred to in section 13 shall contain the following information, namely: —

(a) name and address of the corporate debtor under the corporate insolvency resolution process;

(b) name of the authority with which the corporate debtor is incorporated or registered;

(c) the last date for submission of claims;

(d) details of the interim resolution professional who shall be vested with the management of the   corporate debtor and be responsible for receiving claims; `

(e) penalties for false or misleading claims; and (f) the date on which the corporate insolvency resolution process shall close, which shall be the one hundred and eightieth day from the date of the admission of the application under sections 7, 9 or section 10, as the case may be.”

[6] “The committee of creditors may approve a resolution plan by a vote of not less than seventy-five per cent. of voting share of the financial creditors.”

[7] (2022) 2 SCC 401

For more information please visit our website here to know more: https://legalpay.in/