Implication of Section 53 of the IBC corresponding to the State Taxes as Statutory Dues – By Yash Gupta

Implication of Section 53 of the IBC corresponding to the State Taxes as Statutory Dues

-Authored by
Yash Gupta,
Student of Graduate Insolvency Programme (GIP)

A judgement in the case of State Tax officer v. Rainbow Papers Limited, reported at (2022) 107 SC, reversing the order of the NCLAT and held that Section 48 of the GVAT Act is not in dispute with Section 53 or any other sections of the IBC.


The Respondent is a company engaged in the business of manufacture and sale of Crafts and Oars in Gujarat since 1990. It has been assessed for Value Added Tax and Central Sales Tax under the Gujarat Value Added Tax, 2003 (hereinafter referred to as the “GVAT Act”).  One operational creditor of the respondent, filed Company Petition under Section 9 of the IBC before Ahmedabad Bench of the National Company Law Tribunal (NCLT), for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent and the same had been admitted by the NCLT. A Committee of Creditors was constituted on 10th October 2017 and the appellant filed a claim before the Resolution Professional in the requisite Form B, claiming that Rs.47.36 crores (approximately), was due and payable by the respondent to the appellant, towards its dues under the GVAT Act. The claim was filed beyond time. Later the appellant called upon the Resolution Professional to confirm the claim of the appellant towards outstanding tax dues and the Resolution Professional informed the appellant that the entire claim of the appellant had been waived off. Therefore, the appellant challenged the Resolution Plan by making an application before the Ahmedabad Bench of the NCLT contending that Government dues could not be waived off. The appellant prayed for payment of total dues towards VAT/CST on the ground that the Sales Tax Officer was a secured creditor.


The Adjudicating authority stated that Section 53 of IBC lists the priorities to the given to the beneficiaries of liquidation value of the asset of the corporate debtor. The provision of section 53 makes it amply clear that operational creditors are at the end of the list of beneficiaries as the secured financial creditors have edge over the others and the Operational creditors have no locus standi as far as approval of the Resolution Plan by the Committee of the Creditor is concerned. The NCLT further stated that the provisions of the IBC dispelled the misconceptions of the Appellant-Intervener that they have edge over the other beneficiaries. The very object of the IBC is resolution of failing corporate debtor companies and not liquidation of Corporate Debtor companies. The NCLT therefore dismissed the appellant’s plea as unmaintainable and ordered that the Resolution Applicant filed an amended resolution plan before the COC and was given one day to provide an addendum to the revised plan.


The appellant filed an appeal with the NCLAT under Section 61 of the IBC against the aforementioned Adjudicating Authority’s order dated February 27, 2019. The NCLAT dismissed the appeal by the judgement and order Impugned reported at (2019) 463 NCLAT. As a result, the NCLAT determined that the Adjudicating Authority observed that the Appellant filed a claim at a much later stage, not only before the Resolution Professional, but also before the Adjudicating Authority. The Appellant failed to file his claim on time. It approached the ‘Resolution Professional’ after the Adjudicating Authority approved the ‘Resolution Plan.’

In light of the IBC’s Statement of Objects and Reasons, together with the Section 53 of the IBC, the government cannot claim first charge over the ‘Corporate Debtor’s’ property. Section 48 of the GVAT Act cannot take precedence over Section 53 of the IBC. As a result, the Appellant does not meet the definition of ‘Secured Creditor’ under Section 3(30) read with Section 3(31) of the IBC. Furthermore, since the ‘Sales Tax Department’ filed its claim after the plan had been approved by the ‘Committee of Creditors,’ the ‘Resolution Professional’ had no jurisdiction to hear it, and it was rightfully denied.


The appeal has been filed 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.

The Court stated that the amendment to Regulation 12 states that creditors must submit proof of claim on or before the last date specified in the public announcement, however the Regulations must be read in their entirety and not in truncated form, and interpreted in light of the legislative requirements of the IBC, as interpreted by this Court. This Court has repeatedly decided that the time lines set out in the IBC, even for the completion of proceedings, are just directory and not mandatory. It must be noted that under this case the state was under no obligation to lodge a claim in respect of dues which are of statutory concern for which the recovery proceedings have also been initiated and both the adjudicating and the appellate authority misconstrued the regulation in question.

It has been contended on behalf of the Appellant that the State filed proceedings against the respondent-Corporate Debtor in order to recover its statutory dues. The Corporate Debtor’s Books of Accounts would have shown the Corporate Debtor’s liability to the State in respect of its statutory dues. The Resolution Professional failed to investigate the Corporate Debtor’s Books of Accounts, verify and include the same in the information memorandum, and make provision for the same in the Resolution Plan, in violation of its legal obligation.

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 Resolution Professional was obliged to receive, verify, and collate claims before submitting them to the Adjudicating Authority for approval. Further Swiss Ribbons (P) Ltd. v. Union of India [2019] 03 SC has been referred, in which this Court concluded that the Resolution Professional lacks adjudicatory powers to accept or reject the claim.

The State’s claim was delayed, and there was no time limit for submitting a claim with proof. The NCLT held in Vishal Saxena & Anr. v. Swami Deen Gupta Resolution Professional, that the time limit in Regulation 12 for filing a claim is only directory and not mandatory.

A Resolution Plan can only be approved by the Adjudicating Authority if it complies with Section 30(2) of the IBC, and the Resolution Professional must vouch for the fact that the Resolution Plan provides for the payment of operational creditors’ dues that must not be less than the amount that would be paid to those creditors in the event that the Corporate Debtor was liquidated in accordance with Section 53, or the amount that would have been paid to such operational creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in Sub-section 2 of Section 53..

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.

In section 31(2), the term “shall” denotes a mandate/binding directive, whereas the expression “may” denotes discretion. The Adjudicating Authority’s discretion may not be used arbitrarily or whimsically. If the proven facts and circumstances necessitate exercising discretion in a specific manner, discretion must be exercised in that manner. If a Resolution Plan appears to be in conflict with the law and/or the provisions of the IBC and/or the Rules and Regulations created thereunder, the Resolution must be rejected.

If a company is unable to pay its debts, including statutory dues to the government and/or other authorities, and there is no structure in place to discharge those debts, the firm must be liquidated and its assets sold and distributed in accordance with Section 53 of the IBC. The court also stated that the committee of creditors cannot secure their own dues at the expense of statutory dues payable to any Government or Governmental Authority.

Section 48 of the GVAT Act is not in conflict with Section 53 of the IBC, which states that secured creditors’ debts rank equally with other specified debts. Under the GVAT Act, the State is a secured creditor. According to Section 3(30) of the IBC, a secured creditor is a creditor to whom a security interest is credited. By operation of law, such a security interest could be created and any Government or Governmental Authority is not excluded from the definition of secured creditor in the IBC.

The Supreme Court held that the Appellate Authority (NCLAT) and the Adjudicating Authority (NCLT) erred in law in rejecting the appellant’s claim. As aforementioned, the failure to file a claim on time cannot be the sole parameter for its rejection. In light of the findings stated above, the Resolution Professional may consider a new Resolution Plan. This judgement and order, however, will not preclude the Resolution Applicant from submitting a plan in light of the remarks mentioned above, including provisions for the statutory creditors’ dues, such as the appellant.

Conclusion and Analysis

Section 53 specifies the priority order or distribution waterfall by which the proceeds of the liquidation estate are to be dispersed to stakeholders. The IBC has substantially changed the rules of the game, putting financial creditors ahead of the government and statutory dues in terms of priority. Section 53(1) begins with a non-obstante clause, stating that the proceeds from the sale of the liquidation assets shall be distributed in the order of priority listed, notwithstanding anything to the contrary contained in any other law enacted by the parliament or any state legislature for the time being in force. The IBC is both a central act and an umbrella legislation that deals with the specific subject of insolvency and bankruptcy. Any other law containing a non-obstante clause determining a different priority for any kind of debt shall be considered as repugnant to the IBC and the provisions of any other law shall not prevail.

In this case the apex court held that the State is a secured creditor under the GVAT Act and prioritised the statutory dues of the Government. A security interest could be created by operation of law. The court held that if a company is unable to pay its debts, including statutory dues to the Government and/or other authorities, and there is no plan which contemplates dissipation of those debts, the company must be liquidated.

The statutory dues which would otherwise falls under clause (e) of Section 53(1) will now be on the same plane with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date, as   the debts owed to a secured creditor include the State under the GVAT Act. However, this will invite the state of dubiety and will be Greek to the Resolution Professionals if not been interceded by the Legislature by way of an amendment keeping in mind the intent of the Insolvency and Bankruptcy Code, 2016.



  1. Insolvency and Bankruptcy Code, 2016
  2. State Tax Officer v. Rainbow Papers Limited (Civil Appeal no. 1661 of 2020) (2022) 107 SC
  3. Swiss Ribbons (P) Ltd. v. Union of India [2019] 03 SC
  4. Vishal Saxena & Anr. v. Swami Deen Gupta Resolution Professional


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