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State Tax Officer vs Rainbow Papers Limited: Section 53 of IBC

Fox & Mandal State Tax Officer vs Rainbow Papers Limited: Section 53 of IBC

State Tax Officer vs Rainbow Papers Limited: Section 53 of IBC

State Tax Officer v Rainbow Papers Limited: Recent Supreme Court Judgement on Section 53 of IBC – insights by Ms. Iram Hassan Principal Associate.

The Supreme Court crystallizes the role of the Resolution Professional (RP) when he takes over the management of the corporate debtor as well as the duty of the Adjudicating Authority while approving the Resolution Plan.

The matter in issue was that the State Tax Officer had attached assets of the Corporate Debtor under S. 48 of the Gujarat Value Added Tax, Act 2003. This provision states that “Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first change on the property of such dealer, or as the case may be, such person”.
The State Tax Officer approached the RP to recover its dues from the Corporate Debtor after the sanction of a Resolution Plan. The RP rejected the claim, stating that the Resolution Plan would apply and since State had failed to apply on time, the State’s dues were waived in terms of the Resolution Plan. Such order of RP was challenged before Adjudicating Authority and then before NCLAT. Both forums rejected the plea of the appellant.

In appeal, the Supreme Court, however, stated that the RP was obliged to check the books of the corporate debtor to determine if any dues were owed to creditors, including statutory dues to the State. As the RP had failed to discharge this responsibility and that the Adjudicating Authority also failed to adhere to the provisions Section 31 of the Court while approving the Resolution Plan, the Supreme Court set aside the Resolution Plan. In doing so, the Court widened the definition of ‘security interest’ under S 3(31) of the IBC to include security interest created by law such as in the present case.

The Supreme Court further held that S. 48 of the Gujarat Value Added Tax Act 2003 is consistent with the IBC. This observation allows States to be considered secured creditors under the Code and rank equally with other specified debts under Section 53 (1) (b) (ii) of the Code.

The judgment thus has great impact on the waterfall mechanism under Section 53 of the IBC.


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