NCLAT Upholds Gujarat VAT Department as Secured Creditor in Sterling Lam Insolvency Under Statutory Charge of GVAT Act
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, has upheld the order of the National Company Law Tribunal (NCLT) Ahmedabad, affirming that the Gujarat State Tax Department must be treated as a secured creditor in the insolvency proceedings of Sterling Lam Limited. A Bench comprising Judicial Member Yogesh Khanna and Technical Member Indevar Pandey, in its order dated November 13, held that the statutory charge created under Section 48 of the Gujarat Value Added Tax Act, 2023 (GVAT Act) constitutes a valid security interest under the Insolvency and Bankruptcy Code (IBC), thus entitling the Department to priority distribution of dues.
The dispute arose during the Corporate Insolvency Resolution Process (CIRP) of Sterling Lam. Prior to the commencement of insolvency in 2020, the Gujarat State Tax Department had attached the factory land of the corporate debtor in 2019 for unpaid VAT dues. During CIRP, the Department filed a claim of ₹38.58 crore, of which only ₹3.37 crore was admitted by the Resolution Professional (RP). The RP classified the Department as an unsecured operational creditor, prompting objections and litigation before the NCLT.
The NCLT later directed that certain withheld amounts be disbursed to the Department, treating it as a secured creditor in light of the statutory charge under Section 48 of the GVAT Act. This order was challenged by Cosmos Bank, the sole financial creditor of the Committee of Creditors (CoC), before the NCLAT. The Bank argued that the NCLT had exceeded its jurisdiction by effectively modifying an already-approved Resolution Plan dated June 29, 2022, which had attained finality under Section 31 of the IBC. It further contended that the tax authorities had never challenged their original classification and therefore could not seek secured creditor status at a later stage.
The State Tax Department, supported by the RP, submitted that the assessment orders had already attained finality and that Section 48 of the GVAT Act automatically created a charge over the corporate debtor’s assets by operation of law. It further argued that the RP had intentionally withheld a portion of the amount because the Department’s claim to secured status was already pending adjudication before the NCLT prior to approval of the Resolution Plan.
The Appellate Tribunal relied extensively on the Supreme Court’s landmark decision in State Tax Officer v. Rainbow Papers Ltd. (2022), wherein the Court held that Government departments can be “secured creditors” if a statutory first charge exists by operation of law. The NCLAT observed that the IBC’s definition of “secured creditor” does not exclude Government authorities and that “security interest may be created by operation of law,” aligning with the Supreme Court’s interpretation.
In rejecting the financial creditor’s challenge, the NCLAT clarified that the NCLT had not modified the commercial terms of the Resolution Plan. Instead, it had merely directed the disbursement of the withheld amount in accordance with the pending legal issue and binding Supreme Court jurisprudence. Further, the Tribunal noted that the RP’s statutory duties do not conclude immediately upon approval of the Resolution Plan, especially where disputed distributions remain unresolved.
Concluding that the statutory charge under the GVAT Act created a valid security interest prior to the initiation of insolvency, and that the issue of classification was already under judicial consideration before the NCLT, the NCLAT upheld the NCLT’s decision. The appeal filed by Cosmos Bank was accordingly dismissed.
Appearance
For Appellant: Mr. Ramchandra Madan, Mr. Tushar Nigam, Advocates.
For Respondent No.1/RP: Ms. Honey Satpal, Mr. Nipun Singhvi, Ms. Pooja Singh, Mr. Akash Agarwalla, Advocates.
For Respondent No. 3 (Gujarat State Tax Department): Ms. Ritu Guru, Advocate.
Cause Title: The Cosmos Co-operative Bank Ltd. v. Kalish T. Shah & Ors.
Case No: Company Appeal (AT) (Ins.) No. 774 of 2024.
Coram: Judicial Member Yogesh Khanna, Technical Member Indevar Pandey
