Insolvency Law: Is Govt a secured creditor & dues of income tax, GST, etc. are secured debt ?

One of the most contentious issues during insolvency process is whether dues of the Government like Income-Tax, Sales Tax, Value Added Tax etc. are secured debt and whether the Government is a secured creditor ?

In its recent judgment, the National Company Law Appellate Tribunal has more and less cleared the cloud. 

In its recent 𝗷𝘂𝗱𝗴𝗲𝗺𝗲𝗻𝘁 𝗱𝗮𝘁𝗲𝗱 𝟳𝘁𝗵 𝗙𝗲𝗯., 𝟮𝟬𝟮𝟯 𝗶𝗻 𝗖𝗼𝗺𝗽𝗮𝗻𝘆 𝗔𝗽𝗽𝗲𝗮𝗹 (𝗔𝗧) (𝗜𝗻𝘀𝗼𝗹𝘃𝗲𝗻𝗰𝘆) 𝗡𝗼. 𝟮𝟰𝟮 𝗼𝗳 𝟮𝟬𝟮𝟮 (𝗣𝗿𝗶𝗻𝗰𝗶𝗽𝗮𝗹 𝗖𝗼𝗺𝗺𝗶𝘀𝘀𝗶𝗼𝗻𝗲𝗿 𝗼𝗳 𝗜𝗻𝗰𝗼𝗺𝗲 𝗧𝗮𝘅 & 𝗔𝗻𝗿. 𝘃𝘀. 𝗔𝘀𝘀𝗮𝗺 𝗖𝗼𝗺𝗽𝗮𝗻𝘆 𝗜𝗻𝗱𝗶𝗮 𝗟𝘁𝗱).

The instant Appeal preferred under Section 61 of the Insolvency and Bankruptcy Code, 2016 (for short IBC) being aggrieved and dissatisfied by the order dated 20.01.2021 passed by the NCLT, Guwahati Bench in IA No. 10 of 2020 in C.P. (IB) No. 20/GB/2017 wherein the application i.e., I.A. No. 10 of 2020 filed by the Respondent herein /Corporate Debtor- Assam Company India Ltd. prayed for the following reliefs:

i) Direction to be given to the respondents for stay of all the operations for attachment against the Applicant.

ii) Setting aside of the order for attachment.

iii) Recalling of the observation passed by the Hon’ble National Company Law Tribunal, Guwahati.

iv) Ad-interim order in terms of prayers above.

“20. Since the Respondents have filed its further claim by issuing attachment notices dated 28.01.2020 under Section 226 (3) of the Income Tax Act, 1961 attaching a sum of Rs. 6,71,05,730.00 towards Income Tax and Rs. 1,70,53,311.00 towards interest for the assessment year 2014-15 to the Banker of the applicant i.e., to the Chief Manager/Principal Officer, Allahabad Bank, Dibrugarh Bench i.e., after 15 months of the approval of the Resolution Plan, their claim at this stage cannot be entertained. Prayer made by the Resolution Applicant in this I.A. No. 10 of 2020 [in CPIB No. 20/GB/2017] is accepted to the following extent:

(1) Attachment orders issued by the Income Tax Department are hereby set aside.

(2) Company can operate the Bank Account without any obstructions from the Income Tax Department.

(3) The Resolution Applicant / the Petitioner is hereby directed to strictly implement the Resolution Plan as approved in time without any violation.

(4) The Petitioner is further directed to file a compliance report within 15 days of this order before the Registry stating that the Company has been paying all current statutory dues up-to-date especially, EPF, Income Tax, GST without delay.

21. Accordingly, the IA No. 10 of 2020 is disposed of with the above observations and directions.”

The Ld. Counsel for the Appellants also placed reliance on the judgment of the Hon’ble Supreme Court in the case of “State Tax Officer (1) Vs. Rainbow Papers Limited, Civil Appeal No. 1661 of 2020 dated 06th September, 2022” wherein Hon’ble Supreme Court held as hereunder:

“41. Section 31 of the IBC which provides for approval of a Resolution Plan by the Adjudicating Authority makes it clear that the Adjudicating Authority can approve the Resolution Plan only upon satisfaction that the Resolution Plan, as approved by the Committee of Creditors (CoC), meets the requirements of Section 30(2) of the IBC. When the Resolution Plan does not meet the requirements of Section 30(2), the same cannot be approved.

42. In Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., cited by the learned Solicitor General, this Court observed :- “64. It could thus be seen, that the legislature has given paramount importance to the commercial wisdom of CoC and the scope of judicial review by adjudicating authority is limited to the extent provided under Section 31 of the I&B Code and of the appellate authority is limited to the extent provided under sub-section (3) of Section 61 of the I&B Code, is no more res integra.

65. Bare reading of Section 31 of the I&B Code would also make it abundantly clear that once the resolution plan is approved by the adjudicating authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders. 

Such a provision is necessitated since one of the dominant purposes of the I&B Code is revival of the corporate debtor and to make it a running concern.

“Taking all the facts aforenoted, we are of the considered view that these facts have not been considered by the Adjudicating Authority while passing the impugned order. Admittedly, the judgment passed by the Hon’ble Supreme Court in the case of “State Tax Officer (1) Vs. Rainbow Papers Limited, Civil Appeal No. 1661 of 2020 dated 06th September, 2022”, the dues of the Appellants are ‘Government dues’ and they are Secured Creditors.

 Thus, the impugned order dated 20.01.2021 passed by the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench, Guwahati) in IA No. 10 of 2020 in C.P. (IB) No. 20/GB/2017 is hereby set aside and the matter is remitted back to the Adjudicating Authority (National Company Law Tribunal, Guwahati Bench, Guwahati) with a request to hear the parties (Appellants and Respondent herein) considering the aforesaid facts and also judgment passed by the Hon’ble Supreme Court in the case of ‘Rainbow Papers Limited Case (supra)’ and pass fresh orders as expeditiously as possible.

With these observations and directions, the instant Appeal is disposed of.

1.#NCLAT set aside an #NCLT order inter alia allowing Corporate Debtor’s application for setting aside the attachment order issued by the Income Tax Department.

2. NCLAT emphasized on the position of law laid down by #Supreme Court of India in #RainbowPapers wherein it was held that the State was a secured creditor under the Gujarat Value Added Tax Act and that the definition of secured creditor in the IBC did not exclude any Government or Governmental Authority.

Dr. Ajay Kummar Pandey

( LLM, MBA, (UK), PhD, AIMA, AFAI, PHD Chamber, ICTC, PCI, FCC, DFC, PPL, MNP, BNI, ICJ (UK), WP, (UK), MLE, Harvard Square, London, CT, Blair Singer Institute, (USA), Dip. in International Crime, Leiden University, the Netherlands )


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