Hon. Supreme Court in the case of STATE TAX OFFICER Vs RAINBOW PAPERS LIMITED in the CIVIL APPEAL NO. 1661 OF 2020 has allowed the appeal filed by Gujarat State VAT Officer, which was filed against the order of NCLAT, wherein NCLAT has dismissed the appeal filed by State Tax Officers on two grounds that the claim filed by the State Tax Officer is beyond time limit as given by Resolution Professional and govt dues are not are the secured creditor. However, Hon Supreme Court has held that NCLAT has erred in giving such decisions. It is important to understand the grounds on which Hon Supreme Court have giving the landmark decision.
A. WHETHER TIME LIMIT FOR THE FILING OF THE CLAIM BEFORE RESOLUTION PROFESSIONAL IS MANDATORY OR DIRECTORY IN NATURE?
It has been held by NCLT in the case of Vishal Saxena & Anr. v. Swami Deen Gupta Resolution Professional
[(2020) SCC Online NCLT 2734] that time stipulation in Regulation 12 for submission of a claim is directory and
not mandatory. Similar view was also taken by the NCLT in its judgment and order dated 10th June 2021 in
Assistant Commissioner of Customs v. Mathur Sabhapathy Vishwanathan [IBA/578/2019 NCLT, Chennai]. The
rejection of the claim of the State is unsustainable in law.
Hon. Supreme Court have confirmed the same that it is not mandatory, but it is the directory and hence even the
delayed claims submitted also needs to be considered by Resolution professional and do the scrutiny for admission and include the same in resolution plan.
B. WHETHER GOVT / TAX DUES ARE AT PAR WITH SECURED CREDITOR?
A. Section 48 of GVAT Act :
48. 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.
B. Section 37 of MVAT Act 2002
37. Notwithstanding anything contained in any contract to the contrary, but subject to any provision regarding creation of first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum, payable by a dealer or any other person under this Act, shall he the first charge on the property of the dealer or, as the case may be, person
C. Section 82 of CGST Act 2017 :
82. Tax to be first charge on property:
Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person
D. Section 53 of IBC 2016 :
“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………..”
It is important to understand the definition of “Secured Creditors” and “Security Interest” :
“3(30) “secured creditor” means a creditor in favour of whom security interest is created;
3(31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance
guarantee;”
Considering the provisions of recovery in the specific tax laws or special laws and IBC provisions, Hon Supreme Court held that govt dues are also to be considered as secured and security interest is created and hence such dues to be treated at par with other financials secured creditors.
In view of the above, Hon Supreme Court held the followings:
1. The Committee of Creditors, 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.
2. 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.
3. As observed above, 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.
Now, financial security creditors will have to share the limited kitty to the Govt as well as dues to employee to be received from liquidation or takeover.
Of course, if case is not registered under IBC or Resolution professional is not appointed and approved by NCLT then financial secured creditor can initiate the action under SARFASAI Act..
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