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There is a specific provision in Section 82 of the CGST Act 2017 which states that ‘Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person’.

When companies are under liquidation, it means that they are not financially goods, and there will be a liability for GST also. In such cases, will the department have the first charge on the property? The answer is no, and the amount payable to the GST department will be like any other corporate creditor. It is pertinent to mention that Insolvency Code overrides CGST and SGST Act, 2017. Thus, if property was attached for recovery of GST dues, the property is required to be detached and handed over to Resolution Professional- Ritesh Prakash Adatiya vs. Deputy Commissioner of State Tax (Enforcement) Division- 8 Surat [2020] 115 taxmann.com 163 (NCLT)

State Tax officer v. Rainbow Papers Limited, reported at (Judgment dated 6th September, 2022):- Recently a question was raised in the case of State Tax officer v. Rainbow Papers Limited, reported at (Judgment dated 6th September, 2022) in Civil Appeal No. 1661 of 2020, ‘whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act which is set out herein below for convenience: –

“48. Tax to be first charge on property. — Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.”

This appeal has been filed before the Hon’ble Supreme Court against the impugned judgement and order dated December 19,2019 passed by the National Company Law Tribunal (NCLAT) dismissing the company appeal filed by the appellant against the order of Adjudicating Authority rejecting the appellant’s application and holding that the Government cannot claim first charge over the Corporate Debtor’s property, as Section 48 of the Gujarat Value Added Tax 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 GVAT Act, cannot prevail over Section 53 of the IBC. The issue was whether the provisions of the IBC, specifically Section 53, overrides the Section 48 of the GVAT Act.

It has been contended that the Resolution Plan does not comply with the IBC’s statutory requirements and is therefore not binding on the State. The term “Secured Creditor” as defined by the IBC is broad and inclusive enough to encompass all sorts of security interests. The statutory charge under Section 48 of the GVAT Act, the claim of the State Tax Department, fits fully within the description of “Security Interest” under Section 3(31) of the IBC, and the State becomes a secured creditor under Section 3(30). The simple fact that a creditor is an operational creditor does not result in the loss of that operational creditor’s status as a secured creditor. The Appellate Authority’s decision is against the provisions of the law and cannot be upheld.

The Adjudicating Authority must be satisfied that the resolution plan meets the requirements of Sub-Section (2) of Section 30 of the IBC before it can approve the resolution plan and which does not meet the requirements of Section 30 of the IBC is invalid and will not bind the State.

The Hon’ble Court has observed the following in their respective para as under-

“53. 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.

54. 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.

55. In our considered view, the NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act. Section 53 of the IBC begins with a non-obstante clause which reads :-

“Not withstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority………..”

56. 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.

57. 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.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

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