State Tax Officer (1) vs Rainbow Papers Limited
“The SC said that the definition of secured creditor in the Insolvency and Bankruptcy Code does not exclude any government or legal authority”
According to the Supreme Court, a resolution plan that ignored statutory demands made on it by state governments or other legal authorities was subject to rejection. It said that no government or legal authority is excluded from the Insolvency and Bankruptcy Code’s (IBC) definition of a secured creditor.
The Supreme Court ruled on Tuesday that financial creditors of a firm cannot safeguard their own obligations by approving the resolution plan of a bankrupt company at the expense of statutory obligations owing to a government agency.
The top court also clarified that if a company cannot 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 company must be liquidated, and its assets must be sold and distributed in accordance with Section 53 of the IBC.
The National Company Law Appellate Tribunal decision dismissing the state’s argument was appealed by a Sales Tax Officer of the Gujarat government. The National Company Law Tribunal issued an order in February 2019 stating that 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 other things, under the said GVAT Act, cannot prevail over Section 53 of the IBC. This means that the government cannot claim first charge over the property of a corporate debtor. This matter Further challenged in the NCLAT, which upheld the NCLT order. The top court overturned the NCLAT ruling, stating that it was manifestly incorrect to state that Section 48 of the GVAT Act supersedes Section 53 of the
IBC. There are no inconsistencies or conflicts between Section 48 of the Gujarat Value Added Tax Act and any other parts of the IBC.
-Adv. Thakur Dipika