A statutory first charge created by a state VAT Act is a security interest under the IBC, making the State a secured operational creditor for those dues. It does not require registration for proof; the statute itself suffices. Central Sales Tax dues, lacking similar provision, are not secured.

Headnote:
(A) Insolvency and Bankruptcy Code, 2016 - Sections 3(30), 3(31), 42, 52, 53(1)(b)(ii), 54 - Gujarat Value Added Tax Act, 2003 - Section 48 - Central Sales Tax Act, 1956 - Section 9(2) - Companies Act, 2013 - Sections 77, 77(3) - IBBI (Liquidation Process) Regulations, 2016 - Regulations 21, 21A - Insolvency and Bankruptcy Code, 2016 - Section 53 - Statutory first charge - Secured creditor - Waterfall mechanism - Distribution in liquidation.

(B) A statutory first charge created by operation of law (e.g., under Section 48 of the GVAT Act) arises immediately upon the passing of an assessment order and does not require any further act of registration or mutation to be effective. The proof required for establishing such a statutory charge is the statute itself and the assessment order, not the modes of proof prescribed for contractual charges in Regulation 21 of the Liquidation Process Regulations (taking note that said regulation uses the word 'may'). (Paras 20, 21)

(C) A secured creditor who does not exercise its option to realise its security interest under Section 52(1)(b) of the IBC is deemed to have relinquished its security interest under the Proviso to Regulation 21A(1) of the Liquidation Process Regulations, thereby falling within the class of secured creditors under Section 53(1)(b)(ii) of the Code for distribution. (Paras 28, 29)

(D) The rule of crown debt gives governmental dues priority only over unsecured debts and does not supersede prior secured debts. The ratio of the Paschimanchal Vidyut Vitran Nigam Ltd. case does not apply to claims backed by a statutory first charge, as clarified in the Cosmos Cooperative Bank Ltd. case. (Paras 15, 26, 27) (E) While the entirety of a State sales tax authority's claim cannot be treated as secured debt, the component of dues recoverable under the State Value Added Tax Act (which creates a statutory first charge) is to be treated as secured debt. The component under the Central Sales Tax Act, which lacks a similar provision, is not secured debt. (Paras 12, 16, 18)

Facts of the case:
The appellant, the State Sales Tax Authority, claimed to be a secured creditor due to a statutory first charge under the State VAT Act. The corporate debtor was ordered into liquidation, and the appellant submitted its claim for tax arrears. The liquidator classified the appellant's claim as operational statutory debt (government dues). The appellant participated in stakeholders' meetings but challenged this classification during the hearing of the liquidator's application for dissolution. The Adjudicating Authority declined to treat the appellant as a secured creditor, leading to the present appeal.

Findings of Court:
The court held that the appellant is a secured operational creditor for its VAT dues (given the statutory first charge under the GVAT Act) but is an operational creditor for its CST dues. The appellant, by not exercising its option to realise its security interest under Section 52(1)(b), is deemed to have relinquished its security interest and is entitled to be treated under Section 53(1)(b)(ii). The court directed the liquidator to ascertain the amount payable to the appellant on this basis and to recall sums from the financial creditor if necessary.

Issues: The main issues were: (1) whether a statutory first charge created under a state VAT Act can be recognised as a security interest for the purposes of distribution of assets during liquidation under the Insolvency and Bankruptcy Code; (2) how such a statutory charge should be proved in a liquidation proceeding; (3) whether the claim for Central Sales Tax dues is also secured; and (4) whether the appellant's claim is barred by delay, acquiescence, or waiver.

Ratio Decidendi: The court ruled that a statutory first charge created by operation of law is a 'security interest' within the meaning of the IBC and that its proof is established by the statute itself, not by the modes prescribed for contractual charges. The claim for VAT dues is secured, but not the claim for CST dues. A creditor with such a charge who does not exercise their option to realise the security under Section 52(1)(b) is deemed to have relinquished it and is entitled to distribution under Section 53(1)(b)(ii).

Result : Appeal partly allowed. The appellant is to be treated as a secured operational creditor for its VAT dues and an operational creditor for its CST dues. The liquidator was directed to make appropriate recalculations and call back sums if necessary. No cost.

Table of Content
1. facts: appeal against dissolution order; state claims secured creditor status under section 48 gvat act. (Para 1 , 2)
2. appellant argues statutory charge under section 48 gvat act makes it a secured creditor. (Para 4)
3. respondents argue appellant failed to prove security interest; delay and acquiescence bar claim. (Para 5 , 6)
4. court analyzes liquidator's oscillating stance on appellant's secured creditor status. (Para 7 , 8 , 9 , 10 , 11)
5. only vat dues qualify for secured creditor treatment; cst dues do not. (Para 12 , 13 , 14 , 15 , 16 , 17 , 18)
6. statutory charge under section 48 gvat act requires no registration; proof is the statute itself. (Para 19 , 20 , 21 , 22 , 23 , 24)
7. no waiver or estoppel applies; appellant actively pursued secured creditor status. (Para 25)
8. appellant deemed to have relinquished security interest under regulation 21a, thus entitled to distribution under section 53(1)(b)(ii). (Para 26 , 27 , 28)
9. appellant treated as secured operational creditor for vat dues; liquidator to recalculate and redistribute. (Para 29)
10. appeal partly allowed; order of adjudicating authority confirmed otherwise. (Para 30)

JUDGEMENT

Per Justice N. Seshasayee, Member (Judicial)

1.This appeal arises out of the Order of the Adjudicating Authority (NCLT, Ahmedabad Bench), dated 19.02.2025 in I.A. No. 1077 of 2023 in C.P. (IB) No. 563/9/04.01.2023, NCLT/AHM/2019 by which it has directed that the corporate debtor be dissolved post liquidation process. And, the appellant contends that it should have been treated as a secured creditor in the distribution process under Sec.53 of the Code.

Facts

2. The material facts are:

a) The appellant is the Sales Tax Authority of the State of Gujarat and the CD, M/s. Shree Raghuvanshi Fibres Pvt. Ltd., fell in arrears of VAT under the Gujarat Value Added Tax Act, 2003 (henceforth GVAT Act) and also CST for four assessment years from 2014-2015 to 2017-2018. According to the appellant a statutory first charge is created in terms of Sec.48 of the GVAT Act. On 05.09.2019, the appellant initiated recovery steps and addressed a communication dated 05.09.2019 to the jurisdictional Mamlatdar seeking attachment and for recording of charge over the immovable properties of the Corporate Debtor. (However, Mamlatdar’s records do not disclose any such charge or attachment of the asset of the CD)

b) On 18.02.2020, the Corporate Debtor, came to be admitted to CIRP. On 07.07.2021, the appellant preferred its Claim vide Form B for ₹.36,87,64,745 for the aforesaid four assessment years. Out of this amount VAT component of the tax arrears constituted ₹.17,94,45,532 plus interest thereon at 18% p.a., and the balance constituted CST arrears plus interest at the same rate.

c) It is required to be stated that in the relevant column in Form B where the details of the security interest which the appellant claims in terms of Sec.48 of the GVAT Act, is required to be stated, the appellant has indicated as ‘N.A’, meaning thereby that this column is not applicable. However, along with the Claim, the appellant also addressed a communication dated 07.07.2021 to the Interim Resolution Professional to create a first charge on the property of the dealer, namely the corporate debtor, in terms of Sec.48 GVAT Act.

d) The CIRP of the CD however failed, and on 30.08.2022, liquidation of the CD was ordered. Now, on 14.09.2022, the appellant preferred its Claim before the liquidator under Form C for ₹.43,45,22,907 for the same four assessment years from 2014–15 to 2017–18. (it may be stated that this claim was increased to ₹.45,17,26,706/-, owing to certain rectification made in the assessment Orders, and on 03.03.2023 a fresh claim was made. The liquidator however, declined to entertain the revised fresh claim vide his communication dated 07.03.2023, noting that the period for submission of Claims had already expired).

e) It may be noted that as was done on the previous occasion during the CIRP, the appellant had i

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