IBC Does Not Override Statutory First Charge Under Gujarat VAT Act, Both Laws Operate In Harmony: NCLAT

The National Company Law Appellate Tribunal at Delhi recently held that the Insolvency and Bankruptcy Code (IBC) does not override a statutory first charge created under the Gujarat VAT Act, and that both laws operate in harmony when such a charge qualifies as a security interest under the Code.

A Bench of Judicial Member Justice Yogesh Khanna and Technical Member Indevar Pandey observed this by noting that the Code only prevails when there is an inconsistency, and that no such inconsistency arises when a statutory first charge fits within the IBC's own definition of security interest.

It said, “Section 238 of the IBC gives the Code an overriding effect over other laws only when there is inconsistency. However, where a statutory first charge under another law is recognized as a “security interest” within the meaning of the IBC itself, there is no inconsistency. Both laws operate in harmony. Section 48 of the GVAT Act and Section 53 of the IBC can co-exist, and the Adjudicating Authority's interpretation ensures this”

The appeal concerned Sterling Lam Limited, which entered insolvency in 2020. The Gujarat State Tax Department had filed a claim for Rs 38.58 crore, of which Rs 3.37 crore was admitted, and had already attached the company's factory land in 2019 for tax dues. This attachment was disclosed in the claim documents.

Even as the Committee of Creditors approved a resolution plan in October 2021 and the NCLT, Ahmedabad approved it in June 2022, an application filed in 2021 regarding removal of the attachment and the State's plea for secured creditor status remained pending before the Adjudicating Authority. The Resolution Professional had kept aside Rs 1.31 crore pending adjudication of that issue.

Cosmos Co-operative Bank Ltd., the sole financial creditor, argued before the NCLAT that the resolution plan had attained finality and that the State Tax Department had earlier accepted unsecured classification. It submitted that the NCLT had no power to revisit distributions after approving the plan, and that the Supreme Court's later ruling in State Tax Officer v. Rainbow Papers Ltd. could not revive claims settled under the plan.

The tax department countered that Section 48 of the GVAT Act created a first charge by operation of law, that it had expressly asserted secured status in its 2021 reply on record, and that the RP had already withheld the disputed amount pending the Supreme Court's impending judgment in Rainbow Papers. It argued that the issue was sub judice at the time the plan was approved and could not be treated as waived.

Upholding the NCLT's decision, the NCLAT observed that the Supreme Court's ruling in Rainbow Papers was binding and had clarified that a statutory first charge under Section 48 of the GVAT Act constitutes a security interest under Section 3(31) of the IBC. The tribunal noted that the RP had set aside the amount on plan approval pending the SC ruling and that directing its release to the State was not a modification of the plan.

On this point, the NCLAT relied on the Supreme Court's conclusion that Section 48 of the Gujarat VAT Act does not conflict with Section 53 or any other provision of the Insolvency and Bankruptcy Code. It held that the State qualifies as a secured creditor under the Act, since the Code's definition of a secured creditor includes situations where a security interest arises by operation of law.

Cause Title: The Cosmos Co. Op. Bank Ltd. v. Kailash T. Shah and Ors.

Case Number: Company Appeal (AT) (Ins.) No. 774 of 2024

For Appellant: Advocates Ramchandra Madan and Tushar Nigam

For Respondents: Advocates Honey Satpal, Nipun Singhvi, Pooja Singh, Akash Agarwalla for the Resolution Professional; Advocate Ritu Guru for the State Tax Officer, Gujarat.

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