NCLAT Upholds Gujarat VAT Dept As Secured Creditor In Sterling Lam Insolvency; Says Statutory Charge Under GVAT Act Creates Security Interest

A bench comprising Judicial Member Yogesh Khanna and Technical Member Indevar Pandey, in an order passed on November 13, held that the NCLT's direction to disburse certain dues to the Department was legally sound and consistent with the Apex Court's judgment in State Tax Officer v. Rainbow Papers Ltd. (Civil Appeal No. 1661/2020).

“Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 of the IBC…the State is a secured creditor,” the Tribunal noted while relying on the Apex Court's finding that statutory dues carrying a first charge by operation of law cannot be kept below financial creditors merely because the dues arise from tax obligations.

The dispute arose from the insolvency process of Sterling Lam, in which Cosmos Bank was the only financial creditor of the Committee of Creditors (CoC). The Gujarat State Tax Department had earlier attached the factory land of the corporate debtor in 2019 for unpaid VAT dues, much before the commencement of the insolvency proceedings in 2020. The Department later filed a claim of Rs. 38.58 crore, of which only Rs. 3.37 crore was admitted by the Resolution Professional. The classification of the Department as an “unsecured operational creditor” by the Resolution Professional was disputed, and the issue remained pending before the NCLT.

Cosmos Bank contended before the NCLAT that the error committed by the NCLT was that it had exceeded its jurisdiction by effectively modifying an approved Resolution Plan dated 29.06.2022. The Bank argued that:

“The Resolution Plan had already attained finality under Section 31, and the Adjudicating Authority had no power to revisit or alter financial distributions after approval.”

It further argued that the Tax Department never challenged its classification as an unsecured creditor nor the Resolution Plan and therefore was not entitled to the status of a secured creditor. In contrast, the Resolution Professional (RP) and the Tax Department argued that the RP had reserved the certain portion of the dues because the issue of the Department's secured creditor status was under consideration. The Department further submitted that assessment orders had attained finality and the statutory charge under the GVAT Act automatically created a secured interest in its favour.

Relying on Rainbow Paper, the Bench affirmed: “Security interest may be created by operation of law. The definition of secured creditor in the IBC does not exclude Government authorities.”

The Tribunal held that where a matter concerning distribution of dues under the IBC is already pending adjudication, the Adjudicating Authority does not modify the Resolution Plan by deciding that pending issue:

“The Adjudicating Authority has not altered the commercial terms of the Resolution Plan; it has merely directed distribution of the withheld amount in accordance with the binding law declared by the Supreme Court.”

The Tribunal further observed that the Resolution Professional's statutory role does not end immediately upon approval of the plan, when a disputed distribution is still subject to judicial consideration.

Finding that the statutory charge created before the initiation of insolvency process constituted a valid security interest, and that the issue of classification was already pending before the NCLT prior to Resolution Plan approval, the NCLAT upheld the NCLT's direction and found it to be lawful and unwarranted for interference.

Case Title: The Cosmos Co-operative Bank Ltd. v. Kalish T. Shah & Ors.

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

For Appellant: Mr. Ramchandra Madan, Mr. Tushar Nigam, Advocates.

For Respondent No.1/RP: Ms. Honey Satpal, Mr. Nipun Singhvi, Ms. Pooja Singh, Mr. Akash Agarwalla, Advocates.

For Respondent No. 3 (Gujarat State Tax Department): Ms. Ritu Guru, Advocate.