Summary
In the corporate insolvency of Rainbow Papers, the Gujarat State Tax Officer claimed about Rs. 47 crore of VAT and CST dues. Section 48 of the Gujarat VAT Act, 2003 makes such dues a first charge on the dealer's property. The resolution professional treated the claim as belated and as waived, and the resolution plan approved by the CoC made no provision for it. The NCLT and NCLAT rejected the State's challenge, holding that Section 48 could not prevail over Section 53 of the IBC and that the State was not a secured creditor. The Supreme Court allowed the appeals. The statutory charge is a 'security interest' under Section 3(31), making the State a secured creditor under Section 3(30). Section 48 is not inconsistent with Section 53. The time for claims under Regulation 12 is directory. A plan ignoring statutory dues fails Section 30(2) and must be rejected and was set aside.
Issues
- Whether the State, holding a statutory first charge under Section 48 of the Gujarat VAT Act, 2003, is a 'secured creditor' under Sections 3(30) and 3(31) of the IBC
- Whether Section 53 of the IBC overrides Section 48 of the GVAT Act
- Whether a claim for statutory dues could be rejected as belated under Regulation 12 of the CIRP Regulations, and whether a resolution plan ignoring such dues could be approved
Provisions considered
- Sections 3(30) and 3(31), Insolvency and Bankruptcy Code, 2016'Security interest' includes a charge, and it can be created by operation of law. The definition of secured creditor does not exclude Government, so the State, with its statutory charge, is a secured creditor. (¶¶ 27, 29, 30, 57)
- Section 48, Gujarat Value Added Tax Act, 2003The first charge for tax dues on the dealer's property is not contrary to or inconsistent with Section 53 of the IBC. Under Section 53(1)(b)(ii), debts of such a secured creditor rank equally with workmen's dues. (¶¶ 2, 55, 56)
- Sections 30(2) and 31, Insolvency and Bankruptcy Code, 2016The Adjudicating Authority may approve only a plan meeting Section 30(2), and a plan that wholly ignores statutory dues owed to a State Government must be rejected. (¶¶ 41, 43, 45, 46, 48, 49, 50, 51, 52)
- Regulations 10, 12 and 14, IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016The time for submitting claims is directory, not mandatory. The State was not obliged to lodge a claim for statutory dues already under recovery, and delay alone cannot justify rejection. (¶¶ 22, 23, 24, 25, 39, 58)
Held
- The timelines in the IBC and the CIRP Regulations are directory. Under the unamended Regulation 12 read with Regulations 10 and 14, the State was not obliged to lodge a claim for statutory dues under recovery and could be asked to substantiate them. The NCLT and NCLAT misconstrued the Regulations, and delay cannot be the sole ground to reject the claim. (¶¶ 23, 24, 25, 39, 58)
- A charge created by statute is a security interest under Section 3(31), so the State, with its first charge under Section 48 of the GVAT Act, is a secured creditor under Section 3(30). The NCLAT erred in holding that Section 53 overrides Section 48, because there is no inconsistency and the State's secured debt ranks under Section 53(1)(b)(ii). (¶¶ 30, 55, 56, 57)
- Under Section 31(1), the Adjudicating Authority must be satisfied that the plan meets Section 30(2), and approval is not an empty formality. A plan not conforming to law must be rejected under Section 31(2), whose 'may' must be read as 'shall' in such circumstances. A plan that ignores statutory dues to the Government does not bind the State. (¶¶ 43, 46, 48, 49, 50, 51, 52)
- The Committee of Creditors cannot secure financial creditors' dues at the cost of statutory dues owed to Government. If no plan provides for such dues, for example by phased payment or proportional reduction, the company must go into liquidation and its assets be distributed under Section 53. (¶¶ 53, 54)
Result
Appeals allowed. The NCLT and NCLAT orders and the CoC-approved resolution plan were set aside. The resolution professional may consider a fresh plan, and the resolution applicant may submit one providing for statutory dues; no costs.