The Supreme Court on September 06, 2022 in the matter of State Tax Officer (1) v. Rainbow Papers Limited held that Section 48 of the Gujarat Value Added Tax, 2003 (“GVAT”) is not contrary to or inconsistent with Section 53 or any other provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and that the State is a secured creditor under the GVAT Act. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.

In the instant matter, an appeal was filed under Section 62 of IBC against an order of the NCLT (“Adjudicating Authority”) holding that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the GVAT 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. and the aforementioned provision cannot prevail over Section 53 of the IBC. This order was further upheld by the NCLAT. Thus, the issue raised before the court was whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act.

It was contented by the State that in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely falls within the definition of “Security Interest” under Section 3(31) of IBC and the State becomes a secured creditor under Section 3(30) of IBC. The Court observed that the term “Secured Creditor” as defined under the IBC 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 mere fact that a creditor might be an operational creditor would not result in loss of status of that operational creditor as a secured creditor. It was further observed by the court that

“A resolution plan which does not meet the requirements of Sub-Section (2) of Section 30 of the IBC, would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor”

Thus, the Court held that the Resolution plan which ignores the statutory demands payable to any State Government or a legal authority is bound to be rejected by the Adjudicating Authority and that if a company is unable to pay its debts, which include its statutory dues to the Government and/or other authorities, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.