Resolution Plan Which Ignores Statutory Dues Payable To State Government/Legal Authority Liable To Be Rejected : Supreme Court

The Supreme Court held that a Resolution Plan which ignores the statutory demands payable to any State Government or a legal authority, altogether, is liable to be rejected.The court also held that the Section 48 of the Gujarat Value Added Tax 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, would include the State under the GVAT Act, the bench comprising Justices Indira Banerjee and AS Bopanna observed.The court added that the definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.In this case, the adjudicating authority (NCLT) held that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax, 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 etc. under the said GVAT Act, cannot prevail over Section 53 of the IBC. The Appellate Authority upheld this view.In appeal, the issue raised was whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act?Referring to the definition of the term "Secured Creditor" as defined under the IBC, the bench observed that it is comprehensive and wide enough to cover all types of security interests namely, the right, title, 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. The court observed:"If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.. In our considered view, 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."The bench also disagreed NCLAT observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act."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.. 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."Case detailsState Tax Officer (1) vs Rainbow Papers Limited | 2022 LiveLaw (SC) 743 | CA 1661 OF 2020 | 6 September 2022 | Justices Indira Banerjee and AS BopannaAppearances : For Appellant(s) Ms. Aastha Mehta, Adv. Ms. Deepanwita Priyanka, AOR, For Respondents Mr. Rajesh Srivastava, AOR Mr. Gaurav Verma, Adv. Mr. Neeraj Datt Gaur, Adv. Mr. Ankur Kashyap, Adv. Mr. Ayush Agarwala, Adv. Ms. Aditi Mittal, Adv. Ms. Arushi Kaularkar, Adv. Ms. Swati Khanvisara, Adv. Mr. Aman Bajaj, Adv. Mr. Arnav Narain, AORHeadnotesInsolvency and Bankruptcy Code , 2016 - If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan - If a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC - 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. (Para 52-54)Insolvency and Bankruptcy Code , 2016 ; Section 3(30)- Secured Creditor - A creditor in favour...

Resolution Plan Which Ignores Statutory Dues Payable To State Government/Legal Authority Liable To Be Rejected : Supreme Court

Ashok KM

State Tax Officer Vs. Rainbow Papers Limited

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