IBC Does Not Override Statutory First Charge Under State VAT Law; Both Frameworks Co-Exist Harmoniously: NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Delhi has held that the Insolvency and Bankruptcy Code, 2016 does not override a statutory first charge created under Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT Act), where such charge qualifies as a “security interest” under the Code. The Tribunal clarified that the overriding clause under Section 238 of the IBC applies only when an inconsistency exists, and where the statutory charge fits within the Code’s own framework, both legislations operate harmoniously.
A Bench of Judicial Member Justice Yogesh Khanna and Technical Member Indevar Pandey was dealing with an appeal concerning Sterling Lam Limited, which had entered insolvency in 2020. The Gujarat State Tax Department filed a claim for ₹38.58 crore, of which ₹3.37 crore was admitted, and had already attached the company’s factory land in 2019 for unpaid VAT dues. This attachment was disclosed during the claim process before the Resolution Professional.
Following CIRP, the Committee of Creditors approved a resolution plan in October 2021 and the NCLT Ahmedabad approved the plan in June 2022. However, an application filed in 2021 regarding the removal of the attachment and the State’s claim for “secured creditor” status remained pending before the Adjudicating Authority. The Resolution Professional retained ₹1.31 crore in a separate account pending adjudication of that issue.
The appellant, Cosmos Co-operative Bank Ltd., the sole financial creditor, argued that the resolution plan had achieved finality and that the State had already accepted unsecured treatment under the plan. It contended that the NCLT had no jurisdiction to reopen distribution after plan approval and further submitted that the Supreme Court’s later judgment in State Tax Officer v. Rainbow Papers Ltd. could not revive rights settled under an approved resolution plan.
The State Tax Department countered that Section 48 of the GVAT Act created a statutory first charge by operation of law, and that it had expressly asserted secured status in its reply filed in 2021 — much before the resolution plan was approved. It pointed out that the RP had already withheld disputed distribution pending the outcome of the then-pending Rainbow Papers case before the Supreme Court, which showed that the issue was not closed at the time of plan approval.
Upholding the NCLT’s ruling, the NCLAT observed that the Supreme Court in Rainbow Papers had conclusively held that a statutory first charge under Section 48 of the GVAT Act constitutes a “security interest” under Section 3(31) of the IBC. Therefore, the State falls within the definition of a secured creditor. The Tribunal emphasised that the Code prevails only where inconsistency exists, and no inconsistency arises when the statutory first charge itself fits within the IBC’s definition of a security interest.
The NCLAT recorded that directing release of the retained amount to the State did not constitute a modification of the approved resolution plan but merely an implementation of what was already left open for adjudication during CIRP. It held that Section 48 of the GVAT Act and Section 53 of the IBC can co-exist without conflict, and that the State’s secured creditor status could not be taken away merely because the resolution plan had been approved. Finding no ground to interfere with the NCLT’s decision, the Tribunal dismissed the appeal and affirmed the direction to treat the State Tax Department as a secured creditor and to release the retained amount accordingly.
Appearance
For Appellant: Advocates Ramchandra Madan and Tushar Nigam
For Respondents: Advocates Honey Satpal, Nipun Singhvi, Pooja Singh, Akash Agarwalla for the Resolution Professional; Advocate Ritu Guru for the State Tax Officer, Gujarat.
Cause Title: The Cosmos Co. Op. Bank Ltd. v. Kailash T. Shah and Ors.
Case No: Company Appeal (AT) (Ins.) No. 774 of 2024
Coram: Judicial Member Justice Yogesh Khanna, Technical Member Indevar Pandey
