Supreme Court Upholds State’s Secured Creditor Status under GVAT Act in IBC Proceedings: Sanjay Kumar Agarwal vs. State Tax Officer (2023) INSC 963 (31 October 2023)

Date of the Judgment: 31 October 2023
Citation: (2023) INSC 963
Judges: A.S. Bopanna, J. and Bela M. Trivedi, J.

Can a State’s claim under the Gujarat Value Added Tax Act, 2003 (GVAT Act) be considered on par with secured creditors under the Insolvency and Bankruptcy Code, 2016 (IBC)? The Supreme Court, in this review petition, addressed this crucial question, reaffirming its previous stance that the State’s dues under the GVAT Act hold the status of secured creditors. The bench, comprising Justices A.S. Bopanna and Bela M. Trivedi, dismissed the review petitions, upholding the original judgment.

Case Background

The case originated from appeals filed by the State Tax Officer against orders passed by the National Company Law Appellate Tribunal (NCLAT). These orders had dismissed the State’s claims to be treated as a secured creditor with priority over other creditors under the Insolvency and Bankruptcy Code (IBC). The initial dispute arose when the State Tax Officer sought to claim first charge over the properties of Rainbow Papers Limited (Corporate Debtor) under the GVAT Act. The Adjudicating Authority rejected this claim, stating that Section 48 of the GVAT Act could not override Section 53 of the IBC. The NCLAT upheld this decision, leading to the State Tax Officer’s appeals to the Supreme Court. The Supreme Court initially ruled in favor of the State Tax Officer, setting aside the NCLAT’s orders and directing a fresh resolution plan. This led to the filing of review petitions by various parties.

Timeline:

Course of Proceedings

The State Tax Officer initially filed applications before the Adjudicating Authority, seeking to claim a first charge over the properties of the Corporate Debtor, Rainbow Papers Limited, under Section 48 of the GVAT Act. The Adjudicating Authority rejected these applications, holding that the GVAT Act could not override the provisions of the IBC, specifically Section 53. The State Tax Officer then appealed to the NCLAT, which also dismissed the appeals, relying on its previous order. Subsequently, the State Tax Officer filed Civil Appeals in the Supreme Court, which were initially allowed. This led to the filing of review petitions by multiple parties who were not originally part of the proceedings but were affected by the judgment.

Legal Framework

The primary legal provisions at play in this case are:

• Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT Act): This section pertains to the State’s claim as a secured creditor for tax dues.
• Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section outlines the waterfall mechanism for the distribution of assets during liquidation, prioritizing different types of creditors. The section begins with a non-obstante clause:
  “Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority.”
• Section 3(30) of the IBC: Defines a secured creditor as
  “a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law.”
• Order XLVII Rule 1 of the Code of Civil Procedure (CPC): Specifies the grounds for review of a judgment, including a mistake or error apparent on the face of the record.

The Supreme Court had to determine whether Section 48 of the GVAT Act, which grants the State a first charge on the assets of a tax defaulter, could override the waterfall mechanism under Section 53 of the IBC. The Court also had to consider whether the State could be considered a secured creditor under the IBC.

Arguments

Review Petitioners’ Arguments:

• The review petitioners argued that the Supreme Court’s initial judgment failed to consider the waterfall mechanism under Section 53 of the IBC. They contended that the judgment did not properly prioritize creditors as per the IBC, placing government dues at a lower rank than secured creditors and workmen’s dues.
• They relied on a subsequent judgment by a co-ordinate bench in Paschim Anchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited and Others, which observed that the original judgment in this case did not consider the waterfall mechanism under Section 53 of the IBC.
• The petitioners argued that the Supreme Court’s initial judgment had overlooked the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government.

Respondents’ Arguments:

• The respondents argued that the review petitions were without merit and should be dismissed. They contended that the Supreme Court had already considered the relevant provisions of the IBC, including Section 53, in its original judgment.
• They submitted that the State is indeed a secured creditor under the GVAT Act and that the definition of secured creditor under the IBC does not exclude any Government or Governmental Authority.
• The respondents argued that a co-ordinate bench cannot comment upon the judgment rendered by another co-ordinate bench of equal strength and that subsequent decision or a judgment of a co-ordinate Bench or larger Bench by itself cannot be regarded as a ground for review.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues in the review petition, but the core issue was whether the original judgment should be reviewed based on the arguments presented by the petitioners. The main issue was whether the court had failed to consider the waterfall mechanism under Section 53 of the IBC and other relevant provisions of the IBC, and whether the State could be considered a secured creditor under the IBC.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Union of India vs. Nareshkumar Badrikumar Jagad & Others [(2019) 18 SCC 586] to establish that a third party can file a review petition if they are an “aggrieved person.”
• The Court cited M/s. Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi [(1980) 2 SCC 167], Sajjan Singh and Ors. vs. State of Rajasthan and Ors. [AIR 1965 SC 845], Parsion Devi and Others vs. Sumitri Devi and Others [(1997) 8 SCC 715], Shanti Conductors Private Limited vs. Assam State Electricity Board and Others [(2020) 2 SCC 677], Shri Ram Sahu (Dead) Through Legal Representatives and Others vs. Vinod Kumar Rawat and Others [(2021) 13 SCC 1], and Arun Dev Upadhyaya vs. Integrated Sales Service Limited & Another to emphasize the limited scope of review and that it is not a rehearing of the case.
• The Court used Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others [(2021) 3 SCC 1] to clarify that a change in law or subsequent judgment cannot be a ground for review.
• The Court distinguished the reliance on Paschim Anchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited and Others, stating that a co-ordinate bench cannot comment on the judgment of another co-ordinate bench.
• The Court relied on JaiSri Sahu vs. Rajdewan Dubey and Others [AIR 1962 SC 83], Mamleshwar Prasad and Another vs. Kanhaiya Lal (Dead) Through L.Rs. [(1975) 2 SCC 232], and Sant Lal Gupta and Others vs. Modern Cooperative Group Housing Society Limited and Others [(2010) 13 SCC 336] to emphasize the importance of consistency and comity of courts.
• The Court referred to Ghanashyam Mishra and Sons Private Limited through the authorized signatory vs. Edelweiss Asset Reconstruction Company Limited through the Director and Others [(2021) 9 SCC 657] and Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited and Another [(2022) 2 SCC 401] to reiterate the position regarding the approval of resolution plan and the binding nature of a resolution plan.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• Adherence to Precedent: The Court emphasized the limited scope of review and the importance of adhering to its previous judgments unless there was a clear error apparent on the face of the record.
• Consistency in Judicial Decisions: The Court stressed the need for consistency and comity among coordinate benches, stating that a subsequent judgment by a bench of equal strength cannot be a ground for review.
• Reaffirmation of Original Reasoning: The Court reiterated that it had considered the waterfall mechanism under Section 53 of the IBC and other relevant provisions in its original judgment.
• Secured Creditor Status of the State: The Court reaffirmed that the State is a secured creditor under the GVAT Act and that the definition of secured creditor under the IBC does not exclude the State.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

Logical Reasoning:

The Court’s reasoning was primarily based on the legal principles governing review petitions and the interpretation of the IBC and GVAT Act.

The Court considered the argument that it had failed to consider the waterfall mechanism under Section 53 of the IBC. However, the Court rejected this argument, stating that it had explicitly considered Section 53 and other provisions of the IBC in its original judgment. The Court also considered the argument that a subsequent judgment by a co-ordinate bench could be a ground for review. The Court rejected this argument as well, citing the principle that a co-ordinate bench cannot comment upon the judgment of another co-ordinate bench.

The Court reaffirmed its original position that the State is a secured creditor under the GVAT Act and that the definition of secured creditor under the IBC does not exclude the State. The Court emphasized that a review petition is not an appeal in disguise and that it is not permissible to reargue questions that have already been addressed and decided.

The Court quoted from the judgment: “Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC.” It also stated, “As observed above, 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.” and “The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.”

There were no minority or dissenting opinions in this case.

Key Takeaways

• State as Secured Creditor: The judgment reaffirms that the State’s dues under the GVAT Act are considered secured debts under the IBC, placing them on par with other secured creditors.
• Limited Scope of Review: The Supreme Court reiterated that review petitions have a limited scope and cannot be used to reargue settled matters.
• Consistency in Judicial Decisions: The judgment emphasizes the importance of consistency and comity among coordinate benches of the court.
• No Overriding Effect of Section 53: The judgment clarifies that Section 53 of the IBC does not override the State’s status as a secured creditor under the GVAT Act.

Directions

No specific directions were given by the Supreme Court in this judgment. The review petitions were dismissed, upholding the original judgment.

Development of Law

The ratio decidendi of this case is that the State’s dues under the GVAT Act are considered secured debts under the IBC, and the waterfall mechanism under Section 53 of the IBC does not override this status. There was no change in the previous position of law; the judgment reaffirmed the Court’s earlier stance on the issue.

Conclusion

The Supreme Court dismissed the review petitions, reaffirming its earlier decision that the State’s dues under the GVAT Act are to be treated as secured debts under the IBC. The Court emphasized the limited scope of review and the need for consistency in judicial decisions. This judgment clarifies that the State’s claim as a secured creditor is not overridden by the waterfall mechanism under Section 53 of the IBC.

Category

Parent Category: Insolvency and Bankruptcy Code, 2016

Child Categories:

• Section 53, Insolvency and Bankruptcy Code, 2016
• Secured Creditor, Insolvency and Bankruptcy Code, 2016
• Gujarat Value Added Tax Act, 2003
• Review Petition

FAQ

Q: What was the main issue in this case?
A: The main issue was whether the State’s dues under the Gujarat Value Added Tax Act (GVAT Act) should be treated as secured debts under the Insolvency and Bankruptcy Code (IBC).

Q: What did the Supreme Court decide?
A: The Supreme Court dismissed the review petitions, reaffirming that the State’s dues under the GVAT Act are considered secured debts under the IBC.

Q: What does it mean for the State to be a secured creditor?
A: Being a secured creditor means the State has a priority claim over the assets of a company that owes tax dues, similar to banks and other financial institutions.

Q: Can a review petition be used to reargue a case?
A: No, the Supreme Court clarified that a review petition has a limited scope and cannot be used to reargue issues that have already been decided.

Q: Does this judgment change the waterfall mechanism under Section 53 of the IBC?
A: No, the judgment clarifies that Section 53 of the IBC does not override the State’s status as a secured creditor under the GVAT Act.