Section 53 of IBC doesn’t override Section 48 of Gujarat VAT Act: SC

Case Details: State tax officer v. Rainbow Papers Ltd. - [2022] 142 taxmann.com 157 (SC)

Judiciary and Counsel Details

• • Indira Banerjee & A.S. Bopanna, JJ.

Facts of the Case

In the instant case, the following questions were placed before the Supreme Court:

(a) Whether State is a secured creditor under IBC for tax purpose under GVAT Act or not? and

(b) Whether section 53 of IBC overrides section 48 of the GVAT Act or not?

Supreme Court Held

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 the 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.

In view of the statutory charge 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 the IBC and the State becomes a secured creditor under Section 3(30) of the Code.

A resolution plan which does not meet the requirements of Section 30(2) 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.

Section 31(1) of the IBC which empowers the Adjudicating Authority to approve a Resolution Plan uses the expression “it shall by order approve the resolution plan which shall be binding…” subject to the condition that the Resolution Plan meets the requirements of Section 30(2). If a Resolution Plan meets the requirements, the Adjudicating Authority is mandatorily required to approve the Resolution Plan. On the other hand, Section 31(2) enables the Adjudicating Authority to reject a Resolution Plan which does not conform to the requirements referred to in sub-section (1) of Section 31, and uses the expression “may”.

Even if Section 31(2) is construed to confer discretionary power on the Adjudicating Authority to reject a Resolution Plan, it has to be kept in mind that discretionary power cannot be exercised arbitrarily, whimsically or without proper application of mind to the facts and circumstances which require discretion to be exercised one way or the other.

If a Resolution Plan is ex-facie not in conformity with the law and/or the provisions of IBC and/or the Rules and Regulations framed thereunder, the Resolution would have to be rejected. It is also a well settled principle of interpretation that the expression “may”, if circumstances so demand can be construed as “Shall”.

If the Resolution Plan ignores the statutory demands payable to any State Government or 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.

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.

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.

In view of the above, the Supreme Court concluded that State is a secured creditor for VAT under GVAT Act and Section 53 of IBC doesn’t override section 48 of the GVAT Act